JTS CORP
S-1, 1997-02-14
COMPUTER STORAGE DEVICES
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<PAGE>   1
 
   AS FILED WITH THE SECURITIES AND EXCHANGE COMMISSION ON FEBRUARY 14, 1997
                                                     REGISTRATION NO. 333-
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
 
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549
                            ------------------------
 
                                    FORM S-1
                             REGISTRATION STATEMENT
                                     UNDER
                           THE SECURITIES ACT OF 1933
                            ------------------------
 
                                JTS CORPORATION
             (EXACT NAME OF REGISTRANT AS SPECIFIED IN ITS CHARTER)
 
<TABLE>
<S>                            <C>                            <C>
           DELAWARE                         3573                        77-0364572
(STATE OR OTHER JURISDICTION OF  (PRIMARY STANDARD INDUSTRIAL (I.R.S. EMPLOYER IDENTIFICATION
INCORPORATION OR ORGANIZATION)   CLASSIFICATION CODE NUMBER)               NO.)
</TABLE>
 
                            ------------------------
 
       166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800
  (ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE, OF
                   REGISTRANT'S PRINCIPAL EXECUTIVE OFFICES)
                            ------------------------
 
                               DAVID T. MITCHELL
                            CHIEF EXECUTIVE OFFICER
                                JTS CORPORATION
       166 BAYPOINTE PARKWAY, SAN JOSE, CALIFORNIA 95134, (408) 468-1800
 (NAME, ADDRESS, INCLUDING ZIP CODE, AND TELEPHONE NUMBER, INCLUDING AREA CODE,
                             OF AGENT FOR SERVICE)
                            ------------------------
 
                                   COPIES TO:
                            ANDREI M. MANOLIU, ESQ.
                            MATTHEW W. SONSINI, ESQ.
                               COOLEY GODWARD LLP
  3000 EL CAMINO REAL, 5 PALO ALTO SQUARE, PALO ALTO, CALIFORNIA 94306, (415)
                                    843-5000
                            ------------------------
 
        APPROXIMATE DATE OF COMMENCEMENT OF PROPOSED SALE TO THE PUBLIC:
As soon as practicable after the effective date of this Registration Statement.
                            ------------------------
 
If any of the Securities being registered on this Form are to be offered on a
delayed or continuous basis pursuant to Rule 415 under the Securities Act of
1933, check the following box. [X]
 
If this Form is filed to register additional securities for an offering pursuant
to Rule 462(b) under the Securities Act, please check the following box and list
the Securities Act registration statement number of the earlier effective
registration statement for the same offering. [ ]
 
If this Form is a post-effective amendment filed pursuant to Rule 462(c) under
the Securities Act, check the following box and list the Securities Act
registration statement number of the earlier effective registration statement
for the same offering. [ ]
 
If delivery of the Prospectus is expected to be made pursuant to Rule 434,
please check the following box. [ ]
                            ------------------------
 
                        CALCULATION OF REGISTRATION FEE
 
<TABLE>
<S>                         <C>              <C>              <C>               <C>
- --------------------------------------------------------------------------------
                                             PROPOSED MAXIMUM  PROPOSED MAXIMUM
TITLE OF EACH CLASS OF        AMOUNT TO BE    OFFERING PRICE  AGGREGATE OFFERING     AMOUNT OF
SECURITIES TO BE REGISTERED    REGISTERED        PER SHARE          PRICE       REGISTRATION FEE
- -------------------------------------------------------------------------------------------------
Common Stock -- $.001 par
  value.....................   17,000,000(1)     $3.00(2)     $51,000,000(1)(2)      $15,455
- -------------------------------------------------------------------------------------------------
</TABLE>
 
(1) Represents the estimated maximum number of shares of the Common Stock of the
    Registrant which may be issued to the Selling Security Holders upon
    conversion of the Series C Preferred Stock. In the event of a stock split,
    stock dividend or similar transaction involving the Common Stock of the
    Registrant, in order to prevent dilution, or in the event of an increase in
    the number of shares issuable upon conversion of the Series C Preferred
    Stock by reason of the floating rate conversion price or other adjustments
    described therein, the number of shares registered shall be automatically
    increased to cover additional shares in accordance with Rule 416(a) under
    the Securities Act.
(2) Estimated solely for purposes of calculating the registration fee in
    accordance with Rule 457(c) under the Securities Act based upon the average
    of the high and low sales prices reported for such securities by The
    American Stock Exchange, Inc. on February 13, 1997.
                            ------------------------
     THE REGISTRANT HEREBY AMENDS THIS REGISTRATION STATEMENT ON SUCH DATE OR
DATES AS MAY BE NECESSARY TO DELAY ITS EFFECTIVE DATE UNTIL THE REGISTRANT SHALL
FILE A FURTHER AMENDMENT THAT SPECIFICALLY STATES THAT THIS REGISTRATION
STATEMENT SHALL THEREAFTER BECOME EFFECTIVE IN ACCORDANCE WITH SECTION 8(A) OF
THE SECURITIES ACT OF 1933, AS AMENDED, OR UNTIL THE REGISTRATION STATEMENT
SHALL BECOME EFFECTIVE ON SUCH DATE AS THE COMMISSION, ACTING PURSUANT TO SAID
SECTION 8(A), MAY DETERMINE.
 PURSUANT TO RULE 429 UNDER THE SECURITIES ACT OF 1933, THE COMBINED PROSPECTUS
                               CONTAINED IN THIS
  REGISTRATION STATEMENT RELATES TO THE REGISTRANT'S REGISTRATION STATEMENT ON
                            FORM S-1 (NO. 333-17093)
- --------------------------------------------------------------------------------
- --------------------------------------------------------------------------------
<PAGE>   2
 
     INFORMATION CONTAINED HEREIN IS SUBJECT TO COMPLETION OR AMENDMENT. A
     REGISTRATION STATEMENT RELATING TO THESE SECURITIES HAS BEEN FILED WITH THE
     SECURITIES AND EXCHANGE COMMISSION. THESE SECURITIES MAY NOT BE SOLD NOR
     MAY OFFERS TO BUY BE ACCEPTED PRIOR TO THE TIME THE REGISTRATION STATEMENT
     BECOMES EFFECTIVE. THIS PROSPECTUS SHALL NOT CONSTITUTE AN OFFER TO SELL OR
     THE SOLICITATION OF AN OFFER TO BUY NOR SHALL THERE BE ANY SALE OF THESE
     SECURITIES IN ANY STATE IN WHICH SUCH OFFER, SOLICITATION OR SALE WOULD BE
     UNLAWFUL PRIOR TO REGISTRATION OR QUALIFICATION UNDER THE SECURITIES LAWS
     OF ANY SUCH STATE.
 
PROSPECTUS (SUBJECT TO COMPLETION)
 
DATED FEBRUARY 14, 1997
                               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 GFL Advantage Fund Limited and Genesee Fund
Limited -- Portfolio B 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 Nelson Partners, Olympus Securities, Ltd., RGC International
Investors, LDC and Capital Ventures International (together with GFL Advantage
Fund Limited, Genesee Fund Limited -- Portfolio B and Wharton Capital
Corporation, the "Selling Security Holders") in a January 1997 private
placement. 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"). If all shares of Series B Preferred
Stock and Series C Preferred Stock had been converted and all Investor Warrants
issuable upon conversion of the Series B Preferred Stock had been exercised on
January 31, 1997, the Company would have been obligated to issue 13,590,997
shares of Common Stock in respect thereto. The foregoing estimate is for
illustrative purposes only. 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. 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
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 Common Stock is
traded on AMEX under the symbol "JTS." The last reported sales price of the
Common Stock on AMEX on February 12, 1997 was $3.00 per share.
                            ------------------------
 
                 THIS OFFERING INVOLVES A HIGH DEGREE OF RISK.
                    SEE "RISK FACTORS" BEGINNING ON PAGE 8.
                            ------------------------
 
  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 expenses payable by the Company in
connection with this offering are $191,000. 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               , 1997
<PAGE>   3
 
                               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 Atari and its multimedia entertainment operations. JTS Corporation
("JTS" or the "Company") refers to the pre- and post-merger 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 currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS began volume production of Nordic
drives in the fourth quarter of fiscal 1997. JTS began volume production of
Palladium disk drives in October 1995. The Company markets its products to
original equipment manufacturers ("OEMs"), computer companies and second-tier
systems integrators for incorporation into their computer systems and
subsystems. 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.
 
     JTS was incorporated in February 1994 and remained in the development stage
until October 1995. 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 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.
 
     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.
 
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 applications are
generating increased demand for greater storage capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook computers compara-
 
                                        2
<PAGE>   4
 
ble 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 storage 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 megabit 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. The Company is currently designing into
its disk drives magneto-resistant ("MR") head component technology, which allows
data to be recorded at much higher track densities than metal in-gap ("MIG") or
inductive thin-film head 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 head lifters.
 
     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 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 obtaining cost advantages from volume purchases of materials.
 
                                  RISK FACTORS
 
     In addition to the other information contained in this Prospectus, the
discussion of risk factors on pages 8 to 16 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 report by the Company's independent accountants for the fiscal year
       ended January 28, 1996 contains an explanatory paragraph regarding
       factors which raise substantial doubt about the Company's ability to
       continue as a going concern.
 
     - The Nordic family of 3-inch form factor disk drives has only recently
       been introduced to the market, and there is uncertainty of its market
       acceptance.
 
                                        3
<PAGE>   5
 
     - 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, all of
       which have significantly greater 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>   6
 
                                  THE OFFERING
 
<TABLE>
<S>                                                     <C>
Common Stock outstanding before the Offering..........  104,744,765 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.....  131,782,265 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. Excludes (i) 4,898,933 shares of Common Stock
    issuable upon exercise of options outstanding as of December 31, 1996, of
    which 961,457 shares were exercisable at such date at a weighted average
    exercise price of $0.99 per share; (ii) 337,500 shares issuable upon
    exercise of warrants outstanding as of October 31, 1996, at a weighted
    average exercise price of $0.25 per share; (iii) 3,327,843 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 as of December 31, 1996.
 
(2) Includes 10,037,500 shares of Common Stock that may be issued upon: (i)
    conversion of all of the Series B Preferred Stock at $3.6125 per share of
    Common Stock (which price is equal to the average closing bid price for the
    five trading days preceding the sale and issuance of the Series B Preferred
    Stock (the "Series B Closing")); (ii) exercise of all of the Investor
    Warrants issuable upon conversion of the Series B Preferred Stock and all of
    the Finder's Warrants at $3.6125 per share of Common Stock; (iii) payment of
    dividends on the outstanding shares of Series B Preferred Stock in Common
    Stock; and (iv) further adjustment to the Series B Preferred Stock
    conversion ratio due to anti-dilution adjustments. Also includes 17,000,000
    shares of Common Stock that may be issued upon: (i) conversion of all of the
    Series C Preferred Stock at an assumed conversion price of $3.6125 per share
    of Common Stock; and (ii) further adjustment to the Series C Preferred Stock
    conversion ratio due to anti-dilution adjustments and price fluctuation of
    Common Stock. Also includes 29,354,546 shares to be offered by the
    Registration Rights Holders hereby. If all shares of Series B Preferred
    Stock and Series C Preferred Stock had been converted and all Investor
    Warrants issuable upon conversion of the Series B Preferred Stock had been
    exercised based upon the $3.6125 price noted above, without giving effect to
    possible anti-dilution and other adjustments, the Company would have been
    obligated to issue 11,072,664 shares of Common Stock in respect thereto. The
    foregoing estimate is for illustrative purposes only. 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."
 
                                        5
<PAGE>   7
 
                       SUMMARY HISTORICAL FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                NINE MONTHS ENDED
                                       FISCAL YEARS ENDED DECEMBER 31,     ----------------------------
                                       --------------------------------    SEPTEMBER 30,    OCTOBER 27,
                                       1993(1)     1994(1)     1995(1)        1995(2)         1996(2)
                                       --------    --------    --------    -------------    -----------
                                                                                   (UNAUDITED)
<S>                                    <C>         <C>         <C>         <C>              <C>
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA:
  Net revenues......................   $ 29,108    $ 38,748    $ 14,626      $  11,824       $   35,056
  Cost of revenues..................     42,768      35,200      44,234         18,534           39,122
  Operating loss(3).................    (47,499)    (24,047)    (53,665)       (23,849)        (128,007)
  Net income (loss).................    (48,866)      9,394     (49,576)       (21,881)        (126,646)
  Income (loss) per common share....      (0.85)       0.16       (0.78)         (0.34)           (1.55)
</TABLE>
 
<TABLE>
<CAPTION>
                                                 DECEMBER 31,
                                       --------------------------------     JANUARY 28,     OCTOBER 27,
                                         1993        1994        1995         1996(2)         1996(2)
                                       --------    --------    --------    -------------    -----------
                                                                            (UNAUDITED)     (UNAUDITED)
<S>                                    <C>         <C>         <C>         <C>              <C>
CONSOLIDATED BALANCE SHEET DATA:
  Current assets....................     51,388     113,188      65,126         58,595           42,420
  Working capital (deficit).........     33,896      92,670      55,084         48,417          (11,771)
  Total assets......................     74,833     131,042      77,569         70,175          108,618
  Current liabilities...............     17,492      20,518      10,042         10,178           54,191
  Long-term debt....................     52,987      43,454      42,354         42,354           54,088
  Stockholders' equity..............      4,354      67,070      25,173         17,643              340
</TABLE>
 
                        SUMMARY PRO FORMA FINANCIAL DATA
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED        NINE MONTHS ENDED
                                                          DECEMBER 31, 1995(4)     OCTOBER 27, 1996(4)
                                                          --------------------     -------------------
<S>                                                       <C>                      <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
  DATA:
  Net revenues..........................................        $ 33,403                $  68,821
  Cost of revenues......................................          77,860                   83,865
  Research and development expenses.....................          18,785                   20,733
  Selling, marketing, general and administrative
     expenses...........................................          36,093                   21,258
  Operating loss(5).....................................         (99,335)                 (57,035)
  Net loss(5)...........................................         (96,997)                 (61,202)
  Loss per common share.................................           (0.94)                   (0.59)
 
UNAUDITED PRO FORMA COMBINED BALANCE SHEET DATA:(4)
 
</TABLE>
 
- ---------------
 
(1) Derived from the historical consolidated financial statements of Atari prior
    to the Merger.
 
(2) The Merger was consummated on July 30, 1996 and it was accounted for as a
    purchase of JTS by Atari. Subsequent to the Merger, JTS changed the fiscal
    year of the company 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 nine-month period for 1996 includes the results
    of Atari's operations from January 29, 1996 through October 27, 1996 and
    JTS' operations from July 31, 1996 through October 27, 1996.
 
                                        6
<PAGE>   8
 
(3) Includes an acquired in-process research and development cost of $110.0
    million resulting from the Merger, a gain from the sale of marketable
    securities of $3.9 million in 1996, a gain from the settlement of patent
    litigation of $32.1 million in 1994 and a restructuring charge of $12.4
    million in 1993.
 
(4) The unaudited pro forma combined statements of operations data for the year
    ended December 31, 1995 and for the nine month period ended October 27, 1996
    give effect to the JTS Merger as if the merger was completed at the
    beginning of the periods. The unaudited pro forma combined balance sheet has
    been omitted as the transaction is reflected in the consolidated balance
    sheet as of October 27, 1996, included elsewhere herein.
 
(5) Excludes a nonrecurring gain on the sale of a marketable security amounting
    to $3.9 million and an acquired in-process research and development
    amounting to $110.0 million in 1996. Such amounts are included in the
    historical results of operations for the nine months ended October 27, 1996.
 
                                        7
<PAGE>   9
 
                                  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.
 
     LIMITED OPERATING HISTORY; HISTORY OF OPERATING LOSSES; WORKING CAPITAL
DEFICIT; INDEPENDENT ACCOUNTANTS' REPORT WITH EXPLANATORY PARAGRAPH. 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 and January 28, 1996 of $5.2 million and $32.5 million,
respectively, which resulted from the substantial costs associated with the
design, development and marketing of new products, the establishment of
manufacturing operations and the development of a supplier base. On January 28,
1996, prior to the merger with Atari, JTS had a working capital deficit of $15.2
million and a negative net worth of $38.6 million. 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. The most recent report of independent public accountants
on JTS' financial statements includes an explanatory paragraph describing
uncertainties concerning the ability of JTS to continue as a going concern.
 
     As of October 27, 1996, JTS had a working capital deficit of $11.8 million
and a net worth of $0.3 million. On a consolidated basis, JTS had net revenues
of $35.0 million and an operating loss of $128.0 million for the nine-month
period ended October 27, 1996, which includes the results of Atari's nine-month
operations through October 27, 1996 and JTS' operations from the Merger date
(July 30, 1996) to October 27, 1996. On a pro forma combined basis, JTS and
Atari had net revenues of $68.8 million and an operating loss of $57.0 million
for the nine months ended October 27, 1996.
 
     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. See
"Business -- Products." There can be no assurance that any significant market
for either 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 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.
 
     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 1997 and over the next several
years for facilities expansion, capital expenditures, 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
 
                                        8
<PAGE>   10
 
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
and 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. In this regard, JTS Technology has failed to
obtain certain debt and equity capital required under one of its loan
agreements. In addition, JTS Technology failed to obtain the lender's consent
under a loan agreement to the acquisition of JTS Technology by JTS. Although the
lender's consent may not have been required under the loan agreement and the
lending institution has continued to transact business with JTS Technology and
JTS, there can be no assurance that it will continue to do so in the future. 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."
 
     HIGHLY COMPETITIVE MARKET. The hard disk drive industry is intensely
competitive and dominated by a small number of large companies, including Maxtor
Corporation ("Maxtor"), Quantum Corporation ("Quantum"), Seagate Corporation
("Seagate"), and Western Digital. In addition, a number of computer companies,
such as International Business Machines Corp. ("IBM") and Toshiba Corporation
("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. 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 -- 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. 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
 
                                        9
<PAGE>   11
 
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 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 for
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' printed circuit board assemblies ("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. In this
regard, in the fourth quarter of fiscal 1996, JTS experienced delays in
obtaining sufficient quantities of certain components provided by one supplier,
which resulted in a significant reduction in JTS' production volume during such
period. The Company subsequently added three new suppliers of this component,
but there can be no assurance that production problems of this type or otherwise
will not occur again in the future. 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'
 
                                       10
<PAGE>   12
 
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 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 Markvision International accounted for
approximately 23%, 14% and 12%, respectively, of JTS' total revenues. JTS
expects that sales to a relatively small number of OEMs 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
 
                                       11
<PAGE>   13
 
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 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 December 31, 1995, Atari held over 150
patents in the United States and other jurisdictions which expire from 1996 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 rights to
certain of its intellectual property. Atari has also been involved in several
major lawsuits regarding its intellectual property, including a suit with
Nintendo of America, Inc. and its affiliates ("Nintendo") which was settled in
March 1994 and a suit with Sega which was settled in September 1994. 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 or
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 120,000 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
 
                                       12
<PAGE>   14
 
material adverse effect on JTS' business, operating results and financial
condition. See "Business -- Manufacturing."
 
     RISKS OF INTERNATIONAL SALES AND MANUFACTURING. In fiscal 1997,
substantially all 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 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 included a $4.3 million 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,
 
                                       13
<PAGE>   15
 
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 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, including Sirjang L. Tandon, its Chairman and Corporate
Technical Strategist, David T. Mitchell, its President and Chief Executive
Officer, Kenneth D. Wing, its Executive Vice President, Research and Development
Quality/Reliability, W. Virginia Walker, its Executive Vice President, Finance
and Administration, Chief Financial Officer and Secretary, Amit Chokshi, its
Executive Vice President, Worldwide Operations and Managing Director of India
Operations, Rick R. Brantmeyer, its Executive Vice President, Sales and
Marketing, and Steven L. Kaczeus, its Chief Technical Officer, each of whom
would be difficult to replace. See "Management." JTS does not have an employment
agreement with any of these individuals, other than Mr. Wing. 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.
 
     UTILIZATION OF NET OPERATING LOSSES. As of December 31, 1995, Atari had
federal net operating losses ("NOLs") and tax credit carryforwards in the amount
of approximately $166.8 million, and as of January 28, 1996, JTS had federal
NOLs of approximately $17.0 million. Under the Internal Revenue Code of 1986, as
 
                                       14
<PAGE>   16
 
amended (the "Code"), certain changes in the ownership or business of a
corporation that has 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 liability
of such corporation, its subsidiaries or its successors. The Merger constituted
a change in ownership with respect to JTS, thus substantially restricting the
use of JTS' pre-Merger NOLs against post-Merger income of the Company. In
addition, the Merger or subsequent events have constituted or likely will
constitute an event which results in the imposition of restrictions on the
ability of the Company to utilize the pre-Merger NOLs and tax credit
carryforwards of Atari against the post-Merger income and tax liability of the
Company. There can be no assurance that the Company will be able to utilize all
or any of the pre-Merger NOLs or tax credit carryforwards of Atari or JTS.
 
     CONTROL BY AFFILIATES; ANTI-TAKEOVER EFFECTS. Directors and executive
officers of the Company own approximately 31% of the outstanding shares of
Common Stock (assuming no exercise of options or warrants after December 31,
1996). 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 (including the
shares of Common Stock offered hereby) are issuable by the Company upon the
conversion of the Series B Preferred Stock and the Series C Preferred Stock and
the exercise of the 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 4,152,249 shares and
6,920,415 shares are issuable upon conversion of the Series B Preferred Stock
and Series C 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 the Warrants is subject to adjustment upon the occurrence of
certain dilutive events. As of December 31, 1996, the Company had approximately
104,744,765 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, upon being declared
effective, will register 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. 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
"Shares Eligible for Future Sale" and "Registration Rights."
 
     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
 
                                       15
<PAGE>   17
 
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.
 
                                       16
<PAGE>   18
 
                                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 $191,000. 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 GFL Advantage Fund Limited and Genesee Fund
Limited -- Portfolio B (the "Subscription Agreements"), the Company is obligated
to pay 5% annual dividends on the outstanding shares of Series B Preferred
Stock, payable in cash or Common Stock (the "Series B Dividends"). The Company
intends to pay the Series B Dividends in Common Stock. Furthermore, the Company
may issue additional shares of preferred stock in the future which require the
payment of cash or stock dividends. Other than the Series B 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. In addition, 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 or to authorize the issuance of
capital stock that is senior in dividend 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."
 
                                       17
<PAGE>   19
 
                                 CAPITALIZATION
 
     The following table sets forth the capitalization of the Company as of
October 27, 1996.
 
<TABLE>
<CAPTION>
                                                                        ACTUAL     PRO FORMA(2)
                                                                       ---------   ------------
                                                                            (IN THOUSANDS)
<S>                                                                    <C>         <C>
Short-term debt:
  Current maturities of long-term debt...............................  $   2,242    $    2,242
  Bank line of credit................................................      9,932         9,932
Long-term debt:
  Total long-term debt...............................................  $  54,088        54,088
                                                                       ---------     ---------
     Total debt......................................................  $  66,262        66,262
                                                                       ---------     ---------
Stockholders' equity:
  Preferred Stock: $0.001 par value, authorized 10,000,000 shares; no
     outstanding shares .............................................         --            --
  Common Stock: $0.001 par value, authorized 150,000,000 shares;
     104,744,765 shares issued and outstanding(1) and 131,782,265
     shares outstanding pro forma(2).................................      1,048         1,318
  Additional paid-in capital.........................................    310,875       350,605
  Notes receivable, secured by common stock..........................     (2,510)       (2,510)
  Accumulated deficit................................................   (309,073)     (309,073)
                                                                       ---------     ---------
     Total stockholders' equity......................................        340        40,340
                                                                       ---------     ---------
          Total capitalization.......................................  $  66,602    $  106,602
                                                                       =========     =========
</TABLE>
 
- ---------------
 
(1) Includes 29,354,546 shares of Common Stock offered by the Registration
    Rights Holders hereby. Excludes (i) 4,898,933 shares of Common Stock
    issuable upon exercise of options outstanding as of December 31, 1996, of
    which 961,457 shares were exercisable at such date at a weighted average
    exercise price of $0.99 per share; (ii) 337,500 shares issuable upon
    exercise of warrants outstanding as of November 30, 1996, at a weighted
    average exercise price of $0.25 per share; (iii) 3,327,843 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 Directors' Stock Option Plan; and (v) 2,596,419 shares of Common Stock
    issuable upon conversion of the Company's 5 1/4% Convertible Subordinated
    Debentures as of December 31, 1996.
 
(2) Includes 10,037,500 shares of Common Stock that may be issued upon: (i)
    conversion of all of the Series B Preferred Stock at $3.6125 per share of
    Common Stock (which price is equal to the average closing bid price for the
    five trading days preceding the sale and issuance of the Series B Preferred
    Stock (the "Series B Closing")); (ii) exercise of all of the Investor
    Warrants issuable upon conversion of the Series B Preferred Stock and all of
    the Finder's Warrants at $3.6125 per share of Common Stock; (iii) payment of
    dividends on the outstanding shares of Series B Preferred Stock in Common
    Stock; and (iv) further adjustment to the Series B Preferred Stock
    conversion ratio due to anti-dilution adjustments. Also includes 17,000,000
    shares that may be issued upon: (i) conversion of all of the Series C
    Preferred Stock at an assumed conversion price of $3.6125 per share of
    Common Stock; and (ii) further adjustment to the Series C Preferred Stock
    conversion ratio due to anti-dilution adjustments and price fluctuation of
    the Common Stock. Also includes 29,354,546 shares to be offered by the
    Registration Rights Holders hereby. If all shares of Series B Preferred
    Stock and Series C Preferred Stock had been converted and all Investor
    Warrants issuable upon conversion of the Series B Preferred Stock had been
    exercised based upon the $3.6125 price noted above, without giving effect to
    possible anti-dilution and other adjustments, the Company would have been
    obligated to issue 11,072,664 shares of Common Stock in respect thereto. The
    foregoing estimate is for illustrative purposes only. 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."
 
                                       18
<PAGE>   20
 
                          PRICE RANGE OF COMMON STOCK
 
     The Company's Common Stock was first traded on July 31, 1996 on AMEX under
the symbol "JTS." The following table sets forth, for the periods indicated, the
high and low closing prices per share for the Common Stock as reported on AMEX.
 
<TABLE>
<CAPTION>
                                                                      HIGH       LOW
                                                                      -----     ------
        <S>                                                           <C>       <C>
        Year Ending February 2, 1997:
          Third Quarter.............................................  $5.56     $ 3.25
          Fourth Quarter............................................  $4.56     $ 3.00
        Year Ending February 1, 1998:
          First Quarter (through February 10, 1997).................  $3.25     $ 3.00
</TABLE>
 
     The closing price of the Common Stock on AMEX on February 12, 1997 was
$3.00 per share. The Company had approximately 2,536 holders of record of its
Common Stock as of December 31, 1996.
 
                                       19
<PAGE>   21
 
                       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, included elsewhere herein, with the exception of the Consolidated
Statement of Operations Data prior to fiscal 1993 and the Consolidated Balance
Sheet Data prior to December 31, 1994, which were derived from historical
consolidated financial statements not included herein. The unaudited selected
historical financial data as of October 27, 1996 and for the nine month periods
ended September 30, 1995 and October 27, 1996 are derived from unaudited
consolidated financial statements of the Company and, in the opinion of the
Company, include all adjustments, consisting only of normal recurring
adjustments, necessary for a fair presentation of the financial information. The
unaudited Statement of Operations Data for the nine month period ended October
27, 1996 include the results of Atari's operations for the nine-month period
ended October 27, 1996 and of JTS' operations for the period from July 30, 1996
(the merger data) through October 27, 1996. Operating results for the interim
periods are not necessarily indicative of the results of the Company that may be
expected for the entire fiscal year.
 
<TABLE>
<CAPTION>
                                                                                                  NINE MONTHS ENDED
                                                FISCAL YEARS ENDED DECEMBER 31,              SEPTEMBER 30,   OCTOBER 27,
                                      ----------------------------------------------------   -------------   -----------
                                        1991       1992       1993       1994       1995         1995          1996(1)
                                      --------   --------   --------   --------   --------   -------------   -----------
                                                            (IN THOUSANDS, EXCEPT PER SHARE DATA)    (UNAUDITED)
<S>                                   <C>        <C>        <C>        <C>        <C>        <C>             <C>
 
CONSOLIDATED STATEMENT OF OPERATIONS
  DATA:
  Net revenues......................  $257,992   $127,340   $ 29,108   $ 38,748   $ 14,626     $  11,824      $  35,056
  Cost of revenues..................   189,598    132,455     42,768     35,200     44,234        18,534         39,122
  Acquired in-process research and
    development.....................        --         --         --         --         --            --        110,012
  Selling, general and
    administrative expenses.........    71,744     47,669     16,538     21,820     18,647        12,587          5,705
  Amortization of existing
    technology......................        --         --         --         --         --            --          1,962
  Research and development
    expenses........................    15,333      9,171      4,876      5,775      5,410         4,552          6,262
  Restructuring charges.............        --     17,053     12,425         --         --            --             --
  Operating loss....................   (18,683)   (79,008)   (47,499)   (24,047)   (53,665)      (23,849)      (128,007)
  Other income (expense), net(2)....    42,288     (4,145)    (1,631)    33,441      3,507         1,968          1,361
  Income (loss) from continuing
    operations......................    23,659    (82,719)   (48,866)     9,394    (50,158)      (21,881)      (126,646)
  Discontinued operations...........        --      9,000         --         --         --            --             --
  Income (loss) before extraordinary
    credit..........................    23,659    (73,719)   (48,866)     9,394    (50,158)      (21,881)      (126,646)
  Extraordinary credit..............     1,960        104         --         --        582            --             --
  Net income (loss).................    25,619    (73,515)   (48,866)     9,394    (49,576)      (21,881)      (126,646)
 
EARNINGS (LOSS) PER COMMON SHARE:
  Income (loss) from continuing
    operations......................      0.41      (0.44)     (0.85)      0.16      (0.79)        (0.34)         (1.55)
  Income (loss) before extraordinary
    credit..........................      0.41      (0.29)     (0.85)      0.16      (0.79)        (0.34)         (1.55)
  Net income (loss).................      0.44      (0.28)     (0.85)      0.16      (0.78)        (0.34)         (1.55)
</TABLE>
 
<TABLE>
<CAPTION>
                                                            DECEMBER 31,                       JANUARY 28,   OCTOBER 27,
                                        ----------------------------------------------------   -----------   -----------
                                          1991       1992       1993       1994       1995       1996(1)       1996(1)
                                        --------   --------   --------   --------   --------   -----------   -----------
                                                                                                      (UNAUDITED)
<S>                                     <C>        <C>        <C>        <C>        <C>        <C>           <C>
CONSOLIDATED BALANCE SHEET DATA:
 
  Current assets......................  $239,296   $105,551   $ 51,388   $113,188   $ 65,126    $  58,595     $  42,420
 
  Working capital (deficit)...........   159,831     75,563     33,896     92,670     55,084       48,417       (11,771)
 
  Total assets........................   253,486    138,508     74,833    131,042     77,569       70,175       108,618
 
  Current liabilities.................    79,465     32,988     17,492     20,518     10,042       10,178        54,191
 
  Long-term debt......................    48,492     53,937     52,987     43,454     42,354       42,354        54,088
 
  Shareholders' equity................   125,529     50,583      4,354     67,070     25,173       17,643           340
</TABLE>
 
- ---------------
(1) The Merger was consummated on July 30, 1996 and it 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 a 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 nine-month period for 1996 includes the results
    of Atari's operations from January 29, 1996 through October 27, 1996 and
    JTS' operations from July 30, 1996 through October 27, 1996.
 
(2) Includes a gain from the sale of marketable securities of $3.9 million in
    1996, a gain from the settlement of patent litigation of $32.1 million in
    1994 and a gain from the sale of a Taiwan manufacturing facility of $40.9
    million in 1991.
 
                                       20
<PAGE>   22
 
                       SELECTED PRO FORMA FINANCIAL DATA
 
     The following table also sets forth the unaudited selected pro forma
financial data for the periods which are derived from the Unaudited Pro Forma
Combined Condensed Financial Statements (the "Pro Forma Financial Statements,")
included elsewhere herein. The pro forma combined condensed statement of
operations has been prepared as if the Merger, which was accounted for as a
purchase of JTS by Atari, were consummated at the beginning of the periods
presented. The pro forma combined condensed balance sheet has been omitted as
the merger is reflected in the consolidated balance sheet as of October 27,
1996, included elsewhere herein.
 
     The unaudited selected pro forma financial data is provided for
illustrative purposes only and is not necessarily indicative of the combined
financial position or combined results of operations that would have been
reported had the Merger occurred on the dates indicated, nor do they represent a
forecast of the combined financial position or results of operations for any
future period. No pro forma adjustments have been included herein which reflect
potential effects of (a) administrative efficiencies which may be obtained by
combining Atari and JTS or (b) costs of restructuring, integrating or
consolidating the two companies. The unaudited selected pro forma financial data
should be read in conjunction with the Pro Forma Financial Statements and
related notes, and the historical financial statements and related notes of
Atari, JTS and JTS Technology which are included elsewhere in.
 
<TABLE>
<CAPTION>
                                                           FISCAL YEAR ENDED        NINE MONTHS ENDED
                                                          DECEMBER 31, 1995(1)     OCTOBER 27, 1996(1)
                                                          --------------------     -------------------
                                                             (IN THOUSANDS, EXCEPT PER SHARE DATA)
<S>                                                       <C>                      <C>
UNAUDITED PRO FORMA COMBINED STATEMENTS OF OPERATIONS
  DATA:
  Net revenues..........................................      $     33,403            $      68,821
  Cost of revenues......................................            77,860                   83,865
  Selling, marketing, general and administrative
     expenses...........................................            36,093                   21,258
  Research and development expenses.....................            18,785                   20,733
  Operating loss(2).....................................           (99,335)                 (57,035)
  Net loss..............................................           (96,997)                 (61,202)
  Loss per common share.................................             (0.94)                   (0.59)
</TABLE>
 
- ---------------
 
(1) The unaudited pro forma combined statements of operations data for the year
    ended December 31, 1995 and for the nine month period ended October 27, 1996
    give effect to the Merger as if the Merger was completed at the beginning of
    the periods.
 
(2) Excludes nonrecurring gain on the sale of a marketable security amounting to
    $3.9 million and an acquired in-process research and development expense
    amounting to $110.0 million.
 
                                       21
<PAGE>   23
 
          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.
 
     On July 30, 1996, Atari was merged into JTS (the "Merger") and 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 nine months in the prior year and for the periods in the
current year prior to the three months ended October 27, 1996, include Atari
only. In addition, due to the change in year end Atari's balance sheet for the
end of transition period as of January 28, 1996 is included herein, as are
Atari's operating results for the one month period then ended.
 
     The unaudited pro forma condensed combined statements of operations
included in footnote two to the financial statements give effect to the Merger
as if the acquisition were completed at the beginning of the periods presented.
The following discussion and analysis is based on these pro forma condensed
combined statements for the prior year which combine the historical results of
operations of Atari for the nine month period ended September 30, 1995 with the
JTS unaudited pro forma combined results of operations for the nine month period
ended October 28, 1995 and for the current year which reflects the unaudited pro
forma financials that combine the historical results of operation of Atari and
JTS for the nine month period ended October 27, 1996. The liquidity and capital
resources discussion and analysis is based on the unaudited balance sheet of the
merged company as of October 27, 1996.
 
     Throughout this discussion, 'fiscal 1997' refers to the fiscal year ended
February 2, 1997. At this time, the Company has not completed closing its
accounting books for fiscal 1997, and the complete financial position of the
Company at February 2, 1997 and the operating results for fiscal 1997 have not
yet been finalized. However, JTS anticipates reporting a net operating loss for
fiscal 1997.
 
JTS AND ATARI BACKGROUND
 
     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. 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 "Palladium" family
for desktop personal computers. Total disk drives shipped to date have primarily
consisted of 3.5-inch Palladium drives. While JTS began shipment of Nordic disk
drives to Compaq in the second quarter of fiscal 1997, volume shipments to
Compaq commenced in the fourth quarter of fiscal 1997. The Company markets its
disk drives to original equipment manufacturers ("OEMs"), computer companies and
second-tier systems integrators for incorporation into their computer systems
and subsystems. 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.
 
                                       22
<PAGE>   24
 
     JTS was incorporated in February 1994 and remained in the development stage
until October 1995, when it began shipping its Palladium disk drives to
customers in the United States and Europe. All of JTS' products are manufactured
in Madras, India by its subsidiary, JTS Technology Ltd. (formerly JTS Technology
(India) Pvt. Ltd.), which was acquired in April 1996 and employs approximately
6,000 individuals at December 31, 1996. Since its inception, JTS has incurred
significant losses which have resulted from the substantial costs associated
with the design, development and marketing of new products, the establishment of
manufacturing operations and the development of a supplier base. 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. 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. The fiscal year 1996
report of independent public accountants on JTS' financial statements includes
an explanatory paragraph describing uncertainties concerning the ability of JTS
to continue as a going concern.
 
     Due primarily to lack of market acceptance of its video game console,
Jaguar, Atari has previously significantly downsized its video game 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. Despite the introduction of four
additional game titles in the first quarter of 1996, sales of Jaguar and related
software have remained disappointing due to uncertainty about Atari's commitment
to the Jaguar platform, increased price competition and competitive product
introductions. As a result of continued disappointing sales, management revised
estimates and wrote-down inventory by $5.0 million in the first quarter of 1996.
During July 1996, the Company wrote-down an additional $3.3 million in Atari
inventory. 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.
 
ATARI 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. The current suggested
retail price of Jaguar is $99.99. 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 expects 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 and there can be
no assurance that substantial additional write-downs will not be necessary.
 
     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
 
                                       23
<PAGE>   25
 
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.
 
     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. See Note 12 to the Atari Consolidated Financial Statements.
 
     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.
 
JTS AND ATARI PRO FORMA COMBINED RESULTS OF OPERATIONS FOR THE NINE MONTHS ENDED
OCTOBER 27, 1996 AND THE NINE MONTHS ENDED OCTOBER 28, 1995
 
     For the nine months ended October 27, 1996 pro forma combined results of
operations reflect a net loss of $61.2 million compared to a net loss of $47.0
for the nine months ended October 28, 1995. Such loss excludes the charge-off of
in-process research and development discussed in Note 3 of Notes to unaudited
pro forma condensed combined financial statements of JTS Corporation.
 
     Total pro forma revenues for the nine month period ended October 27, 1996
amounted to $68.8 million compared to pro forma revenues of $17.8 million for
the same nine month period in the previous year. For the nine month period ended
October 27, 1996, the disk drive division shipped approximately 462,000 drives
and recognized revenues of $65.8 million compared to revenues for the same
period in the prior year of $5.9 million. Revenues for the Atari division
amounted to $2.9 million for the nine month period ended October 27, 1996
compared to the $11.8 million recognized by the division for the nine month
period ended September 30, 1995.
 
     The pro forma gross margin deficit for the nine months ended October 27,
1996 was $15.0 million compared to a pro forma deficit of $10.2 million for the
nine months ended October 28, 1995. The gross margin deficit incurred by the
disk drive division for the nine months ended October 27, 1996 was $12.7 million
compared to a $3.5 million deficit incurred by the division for the same period
in the previous year. The Company first shipped disk drives in October 1995 and
has not yet reached production volumes which
 
                                       24
<PAGE>   26
 
fully absorb all fixed production costs. The gross margin deficit for the Atari
division was $2.3 million for the nine months ended October 27, 1996 compared to
a deficit of $6.7 million for the nine months ended September 30, 1995. Such
reduction in the amount of the deficit reflects lower sales volumes and includes
inventory write-downs of $5.4 million and $8.0 million, respectively.
 
     In order for JTS to realize positive gross margins in the future, the
Company will, among other things, have to control manufacturing costs, further
improve manufacturing yields and successfully introduce new products on a timely
basis, none of which can be assured.
 
     Research and development expenses for the nine months ended October 27,
1996 were $20.7 million compared to research and development expenses of $13.2
million for the nine months in the prior year, on a pro forma basis. Research
and development expenses for the disk drive division increased from $8.5 million
for the nine months in the prior year to $20.1 million for the nine month period
in the current year and the $11.6 million increase is principally due to a
significant increase in the number of employees in research and development
required to meet demand for timely product design. Research and development
expenses for the Atari division declined from $4.6 million for the nine months
in 1995 to $700,000 for the nine month period in the current years as a result
of staff reductions in development which took place in the fourth quarter of
1995.
 
     On a pro forma basis selling, general and administrative expenses for the
nine months ended October 27, 1996 totaled $21.3 million, a $3.7 million decline
from the nine month period in the prior year. A decline of $9.6 million was
attributed to the Atari division and was due to reductions in staff and other
operating costs for the division. Selling, general and administrative expenses
for the disk drive division increased $5.9 million to $9.5 million for the nine
month period ending October 27, 1996 as a result of the expansion of JTS
operations and the commencement of marketing and sales efforts. JTS expects that
selling, general and administrative expenses will increase throughout fiscal
1997 in absolute dollars but that such expenses will decline as a percentage of
revenues.
 
LIQUIDITY AND CAPITAL RESOURCES
 
     At October 27, 1996, JTS had cash and cash equivalents of $10.6 million, a
working capital deficit of $11.8 million and a net worth of $340,000.
 
     At October 27, 1996, total debt, including bank credit lines and notes
payable, was $66.3 million. JTS has a $5.0 million revolving line of credit with
Silicon Valley Bank which bears interest at the bank's prime rate plus .75% and
is due and payable on February 28, 1997. As of October 27, 1996, all amounts
available under this line were drawn. JTS also had equipment lease financing of
$4.2 million at October 27, 1996. There were $5.5 million of working capital
loans outstanding between JTS Technology and three Indian banks at interest
rates ranging from 13% to 15% as of October 27, 1996, 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 amount of $12.5 million at interest rates of LIBOR plus
2.75% and LIBOR plus 4%, respectively. At October 27, 1996, JTS Technology's
borrowings under these term loan facilities were $9.3 million, which is due in
2000 through 2002. Amounts borrowed under these loan agreements have been used
for working capital purposes, tooling, facilities expansion and purchases of
capital equipment.
 
     Certain sources of financing are contingent on the Company's ability to
comply with stringent financial covenants. In this regard, certain debt and/or
equity capital was not obtained as required under one loan agreement. JTS began
to provide such capital during the fourth quarter of fiscal 1997 and intends to
completely fulfill this requirement during the first quarter of fiscal 1998. In
addition, certain agreements require the lender's consent to a merger and
similar transactions, which could be interpreted to require the consent of the
lending institution to the acquisition of 90% of the capital stock of JTS
Technology by JTS on April 4, 1996. Such consents were not obtained, but the
lending institution has continued to transact business with the Company. JTS
believes that such matters will not have a material adverse effect on JTS'
business, operating results or financial condition. However, JTS may not be able
to renew or maintain its current financing facilities and its failure to do so
would have a material adverse effect on JTS' business, operating results and
financial condition.
 
                                       25
<PAGE>   27
 
     At October 27, 1996, the Company had $42.3 million of 5 1/4% convertible
subordinated debentures due April 29, 2002, which had originally been issued by
Atari in 1987.
 
     JTS has yet to generate profits and cannot assure that it 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.
 
     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 fiscal year 1998, the
Company plans approximately $30 million in capital expenditures related
primarily to equipment and facilities required to increase drive production
volumes in its Madras, India facility. In addition, significant cash resources
will be required to fund purchases of inventory needed to achieve anticipated
sales levels. Failure to obtain such cash resources will negatively impact the
Company's ability to manufacture its products at required levels.
 
     In September 1996, the Company sold certain of its real estate acquired
from Atari in the Merger to one of its board members for $10 million. The
property was sold at fair value, and the Company has an option to repurchase the
property one year from the date of sale for $10 million. Also, in early November
1996, the Company completed a $15 million private financing involving the sale
of its Series B Preferred Stock. In January 1996, the Company completed a $25
million private financing involving the sale of its Series C Preferred Stock.
JTS anticipates that its available cash will be sufficient to fund its
operations through the fiscal year ended February 1, 1998. In addition, the
Company intends to pursue equipment financing options in order to fund its
capital expenditures necessary to manufacture increasing volumes of disk drives.
Thereafter, the Company anticipates that it will require additional funds to
finance its growth. 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 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.
 
     As of December 31, 1995, Atari had federal net operating losses ("NOL's")
and tax credit carryforwards in the amount of approximately $166.8 million, and
as of January 28, 1996, JTS had federal NOL's of approximately $17.0 million.
Under the Internal Revenue Code of 1986, as amended (the "Code"), certain
changes in the ownership or business of a corporation that has NOL's or tax
credit carryforwards will result in the inability to use or the imposition of
significant restrictions on the use of such NOL's 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 thus
substantially restricting the use of JTS' pre-merger NOL's against post-merger
income of the Company. In addition, the merger or subsequent events have
constituted or likely will constitute an event which results in the imposition
of restrictions on the ability of the Company to utilize the pre-merger NOL's
and tax credit carryforwards of Atari against the post-merger income and tax
liability of the Company. There can be no assurance that the Company will be
able to utilize all or any of the pre-merger NOL's or tax credit carryforwards
of Atari or JTS.
 
                                       26
<PAGE>   28
 
                                    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 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 currently has two product families
in production, the 3-inch form factor "Nordic" family for notebook computers and
the 3.5-inch form factor "Palladium" family for desktop personal computers.
Shipments of Nordic drives to Compaq Computer Corporation ("Compaq") began in
the second quarter of fiscal 1997, and JTS began volume production of Nordic
drives in the fourth quarter of fiscal 1997. JTS began volume production of
Palladium disk drives in October 1995. The Company markets its products to OEMs,
computer companies and second-tier systems integrators for incorporation into
their computer systems and subsystems. 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.
 
     JTS was incorporated in February 1994 and remained in the development stage
until October 1995. In July 1996, the Company completed the Merger with Atari
Corporation ("Atari"). Since 1992, Atari has significantly downsized its
operations and after 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, Modular 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, 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. In 1995, the top six disk drive vendors accounted for approximately 88% of
the unit market share.
 
     In 1995, approximately 89 million hard disk drives were shipped,
representing a 30% increase over the prior year. Approximately 70 million, or
77%, of the hard disk drives shipped in 1995 were sold as part of desktop
personal computers, and approximately 11 million, or 12%, were sold as part of
notebook computers. In 1995, Seagate, Quantum and Western Digital controlled
approximately 61% of the desktop hard disk drive market share, and IBM and
Toshiba controlled approximately 70% of the notebook hard disk drive market
share.
 
                                       27
<PAGE>   29
 
     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 pre-formatted 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 ASIC
controller to manage communications with the computer. The magnetic heads
employed in disk drives have traditionally been based on inductive-head
technology which combines the read and write function within a single head. 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. Management believes that the superior
performance offered by MR technology will make it the dominant head technology
of the future.
 
     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 either 3.5-inch or 2.5-inch form factors.
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 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 applications are
generating increased demand for greater storage capacities and performance at a
lower cost. Second, the demand for mobile computing devices, such as notebook
computers, has kept pace with the significant growth in sales of personal
computers, with portables representing approximately 15% of all personal
computers sold in 1995. As the gap in technology and pricing between desktop and
portable computers continues to narrow, consumers are demanding storage
capacities in notebook 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
 
     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 storage 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 megabit 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
 
                                       28
<PAGE>   30
 
an alternate source for disk drives incorporating Nordic technology. The Company
is currently designing into its disk drives MR head component technology, which
allows data to be recorded at much higher track densities than MIG or inductive
thin-film head 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 ASIC/channel technology and advanced head lifters.
 
     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 certain labor-intensive components in-house 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.
 
INITIAL EFFORTS TO ACHIEVE MARKET ACCEPTANCE OF HARD DISK DRIVE PRODUCTS
 
     JTS believes that the most efficient means to introduce new technologies
and products into the market is by forming key strategic alliances with major
customers, suppliers and other disk drive manufacturers. The Company believes
that by working with major manufacturers in the development of its disk drives,
it can better understand and cater to the needs of the manufacturers' end
product. In addition, by forming alliances with suppliers and other disk
manufacturers the Company can reduce time to market as well as meet the quantity
and timing demands of its larger customers. In connection with the Company's
strategy of establishing JTS' Nordic family of disk drives as the standard for
notebook computers, the Company has entered into two key strategic alliances
with companies in the computer industry.
 
     Compaq
 
     In June 1994, JTS entered into a Development Agreement with Compaq pursuant
to which the two companies established a plan for the development of JTS' Nordic
family of disk drives. Pursuant to the terms of the Development Agreement,
Compaq has paid $500,000 to JTS for product development expenses, has agreed to
design JTS' Nordic disk drives into at least one of Compaq's products and has
agreed to purchase a minimum number of hard disk drives from JTS within two
years following Compaq's acceptance of the first of such products in June 1996.
In addition, JTS has 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 has been 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. The
Company began shipments of Nordic disk drives to Compaq in June 1996. Volume
shipments of Nordic disk drives began in the fourth quarter of fiscal 1997. See
"Risk Factors -- Dependence on Compaq Computer Relationship; Customer
Concentration."
 
                                       29
<PAGE>   31
 
     Western Digital
 
     In February 1995, JTS entered into a Technology Transfer and License
Agreement with Western Digital. Under the terms of the agreement, Western
Digital obtained manufacturing and marketing rights to JTS' 3-inch hard disk
drive products. In return, Western Digital is obligated to make payments to JTS
totalling $6.0 million upon the achievement of certain development milestones
and is licensed to act as an alternate source of Nordic drives to Compaq. As of
January 28, 1996, Western Digital had made milestone payments to JTS in the
aggregate amount of $5.3 million. 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."
 
PRODUCTS
 
     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 drive's
high level of electronic integration that permits placement of the printed
circuit board assembly ("PCBA") in the same plane as the recording disks (this
design is known 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 common
technology 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. The Nordic and Palladium product families share a
substantial percentage of common electronic componentry 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 simplifies inventory management and provides JTS
with purchasing-cost advantages.
 
     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 allows for 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.
 
                                       30
<PAGE>   32
 
     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 make
milestone payments and 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 over a two year
period. Production and shipment to Compaq of Nordic disk drives commenced in the
second quarter of fiscal 1997. Volume shipments of Nordic disk drives began in
the fourth quarter of fiscal 1997. See "-- Initial Efforts to Achieve Market
Acceptance of Hard Disk Drive Products."
 
     Palladium Product Family
 
     Palladium disk drives are 3.5-inch form factor drives designed for desktop
personal computers. The Palladium product family includes two- and three-disk
versions with capacities presently ranging from 1.2 gigabytes to 2.0 gigabytes.
The Palladium drives incorporate low-profile architecture similar to Nordic
drives, measuring 1/2 inch in height compared to competing drives that typically
measure 1 inch in height. The low profile design allows two disk drives to be
configured into the same space required for one competing 3.5-inch drive. JTS
began volume production and shipments of Palladium drives in September 1995.
 
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 Palladium 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' longer-term manufacturing strategy calls for
selective vertical integration to further reduce JTS' manufacturing costs by
capitalizing on the low-cost labor force in India. 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
subsidiary, JTS Technology, located in Madras, India, 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 10% equity interest in JTS Technology at 10% of the net book value
of JTS Technology at the time of the purchase.
 
     The 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 January 31, 1997, 6,270 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.
 
                                       31
<PAGE>   33
 
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.
 
     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 two qualified sources each for PCBAs and for disks and
three qualified sources for heads. JTS' Indian subsidiary imports approximately
85% of the componentry used in the manufacture of its 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. JTS
maintains in-house service facilities for refurbishment or repair of its
products in Madras, India. 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 is presently designing various
high performance features, such as MR heads, new ASIC/channel technology and
advanced head lifters, into each of its hard disk drive product families. 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 Palladium drives with recording capacities of up to 3.0 gigabytes
and Nordic drives with recording capacities of up to 2.1 gigabytes in the first
quarter of fiscal year 1998. As of January 31, 1997, JTS employed 516
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
 
                                       32
<PAGE>   34
 
market JTS disk drives. International sales account for 81% of revenues in
fiscal 1996 and 81% of revenues for the first nine months of fiscal 1997.
 
     A limited number of customers account for a significant percentage of JTS'
total revenue. In fiscal 1997, Karma International, FutureTech International,
Inc. and Markvision accounted for approximately 23%, 14% and 12%, respectively,
of JTS' total revenue. JTS expects that sales to a relatively small number of
OEMs 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 14 to Atari 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. Atari intends to
publish and/or license these titles in 1996. In this regard, Atari commenced
shipment of the PC CD-ROM version of Tempest 2000 in Europe during the first
quarter of 1996. In 1996, 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
 
                                       33
<PAGE>   35
 
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.
 
     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.
 
                                       34
<PAGE>   36
 
     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 December 31, 1995, the Company held over 150 patents
in the United States and other jurisdictions relating to the business of the
Atari division which expire from 1996 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 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 February 2, 1997, JTS had a
backlog of approximately $74 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 January 31, 1997, JTS (excluding the Atari division) had 6,487
full-time employees, of whom 191 were located in San Jose, California, 6,270
were located in Madras, India, 25 were located in the Far East and
 
                                       35
<PAGE>   37
 
1 was located in Europe. Of the full-time employees, 5,597 are engaged in
manufacturing, 26 in marketing, sales and service, 516 in engineering and 46 in
administration and finance and 302 others. 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. JTS does not presently anticipate any further reductions in the Atari
division's workforce. As of January 31, 1997, the Atari division had
approximately nine employees in the United States, including three in
engineering and product development, two in marketing, sales and distribution
and four in general administration and management. In addition, the Atari
division had six employees outside the United States at December 31, 1996.
 
     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 65,000 square feet by the end of
fiscal 1997.
 
     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>
 
                                       36
<PAGE>   38
 
- ---------------
 
* Occupied pursuant to allotment letters provided certain conditions are
  satisfied.
 
LEGAL PROCEEDINGS
 
     The Company is a defendant in a civil action brought in the Superior Court
of the State of California in and for the County of Santa Clara by Citizen
America Corporation, a former supplier, in February 1994 seeking damages of
approximately $900,000 for alleged breach of contract and related claims. The
Company has filed a counter-suit alleging damages of approximately $8.3 million.
 
     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, 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.
 
     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 and removed to
the United States District Court, Northern District of California brought
against Probe Entertainment Limited for breach of contract and related claims. A
counterclaim has been filed by Probe against the Company for alleged breach of
contract. In connection with this matter, Acclaim Entertainment, an affiliate of
Probe, is expected to file a claim against the Company in the near future
seeking damages in excess of $1.25 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 to the Ninth
Circuit Court of Appeals, and a hearing for oral arguments was held on December
12, 1996. The parties are presently awaiting a ruling from the court.
 
     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.
 
                                       37
<PAGE>   39
 
                                   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
W. Virginia Walker          51     Executive Vice President, Finance and
                                   Administration, Chief Financial Officer
                                   and Secretary
Kenneth D. Wing             49     Executive Vice President, Research &
                                   Development Quality/Reliability
Amit Chokshi                42     Executive Vice President, Worldwide
                                   Operations and Managing Director of
                                   India Operations
Steven L. Kaczeus           62     Chief Technical Officer
Rick R. Brantmeyer          49     Executive Vice President, Sales and
                                   Marketing
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.
 
     MS. W. VIRGINIA WALKER joined JTS in November 1995 as Executive Vice
President, Finance and Administration, Chief Financial Officer and Secretary.
Prior to joining JTS, Ms. Walker served as Vice President of Finance and
Administration and Chief Financial Officer of Scios Inc. from 1985 to 1995.
Prior to 1985, Ms. Walker served as Controller for Intersil Inc., a manufacturer
of integrated circuits and at that time a subsidiary of General Electric
Company.
 
     MR. KENNETH D. WING joined JTS in July 1995 as Executive Vice President,
Research & Development Quality/Reliability. 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. AMIT CHOKSHI joined JTS in June 1995 as Executive Vice President,
Worldwide Operations and Managing Director of India Operations. Prior to joining
JTS, Mr. Chokshi co-founded Dastek Corporation, a hard disk drive manufacturing
company, where he served as Vice President of Marketing/Sales and Operations
until December 1994. Mr. Chokshi holds a Bachelor of Science degree in
Statistical Mathematics from Gujarat University, India.
 
                                       38
<PAGE>   40
 
     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. RICK R. BRANTMEYER joined JTS in July 1996 as Executive Vice President,
Sale and Marketing. Prior to joining JTS, Mr. Brantmeyer served as Senior Vice
President, Sales and Marketing of Maxtor from July 1995 to June 1996. From April
1991 to July 1995, Mr. Brantmeyer worked at Western Digital in several
capacities, including Vice President, Marketing, Vice President, Key Accounts
and Vice President, Retail Sales.
 
     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 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
 
                                       39
<PAGE>   41
 
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.
 
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.
 
                                       40
<PAGE>   42
 
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, Research &                    1996     199,835        --      100,000
  Development Quality/Reliability                         1995     103,790        --        --
Amit Chokshi(4).........................................  1997     203,846        --      200,000
  Executive Vice President, Worldwide Operations          1996     104,327        --      200,000
  and Managing Director of India Operations               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. 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. In December 1996, the Company made an $80,000 loan to
    Mr. Wing, payable in full on December 1997. See "Employment Agreement."
 
(4) Mr. Chokshi became Executive Vice President, Worldwide Operations and
    Managing Director of India Operations of JTS in June 1995.
 
(5) Ms. Walker joined JTS in November 1995. Annual compensation for fiscal 1996
    reflects salary paid from November 1995 to January 28, 1996.
 
                                       41
<PAGE>   43
 
EMPLOYMENT AGREEMENT
 
     In June 1995, Kenneth D. Wing, Executive Vice President, Research &
Development Quality/Reliability of JTS, 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 which was forgiven in January 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. Under the 1995 Plan, as amended
and restated, an aggregate of 9,000,000 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 December 31, 1996, options to
purchase 4,898,933 shares of JTS Common Stock had been granted under the 1995
Plan. 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.
 
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
 
                                       42
<PAGE>   44
 
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.
 
                                       43
<PAGE>   45
 
                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.
 
                                       44
<PAGE>   46
 
                              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
 
                                       45
<PAGE>   47
 
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, JTS' Executive Vice President, Finance and Administration
and Chief Financial Officer, 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
 
                                       46
<PAGE>   48
 
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.
 
     In December 1996, the Company made a loan of $80,000 to Kenneth D. Wing
which is due and payable in full in December 1997.
 
     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.
 
                                       47
<PAGE>   49
 
              PRINCIPAL STOCKHOLDERS AND SELLING SECURITY HOLDERS
 
     The following table sets forth certain information regarding beneficial
ownership of the Company's Common Stock as of December 31, 1996 (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, 166
Baypointe Parkway, San Jose, California 95134.
 
<TABLE>
<CAPTION>
                                                     SHARES
                                                   BENEFICIALLY                SHARES BENEFICIALLY
                                                     OWNED                       OWNED AFTER THE
                                                    PRIOR TO      SHARES            OFFERING
                                                      THE         BEING      -----------------------
                                                   OFFERING(1)   OFFERED     NUMBER(1)    PERCENT(2)
                                                   ----------   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>          <C>
SELLING SECURITY HOLDERS AND REGISTRATION
  RIGHTS HOLDERS:
GFL Advantage Fund Limited(3)....................   3,806,227    3,806,227            0         0
Genesee Fund Limited -- Portfolio B(3)...........     761,245      761,245            0         0
Wharton Capital Corporation(4)...................      37,500       37,500            0         0
Nelson Partners(5)...............................   2,123,593    4,250,000            0         0
Olympus Securities, Ltd.(5)......................   2,123,593    4,250,000            0         0
RGC International Investors, LDC(5)..............   2,548,312    5,100,000            0         0
Capital Ventures International(5)................   1,698,875    3,400,000            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..............................   1,013,336    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
Needham Capital Partners L.P.(16)................     525,000      525,000            0         0
Steve Kaczeus, Sr. ..............................     260,511      260,511            0         0
Mario Rosati(17).................................      59,000       59,000            0         0
Richard D. DeGolia(18)...........................      18,500       18,500            0         0
William Elmore...................................      50,000       50,000            0         0
Roger H. Lustberg................................      48,000       48,000            0         0
</TABLE>
 
                                       48
<PAGE>   50
 
<TABLE>
<CAPTION>
                                                     SHARES
                                                   BENEFICIALLY                SHARES BENEFICIALLY
                                                     OWNED                       OWNED AFTER THE
                                                    PRIOR TO      SHARES            OFFERING
                                                      THE         BEING      -----------------------
                                                   OFFERING(1)   OFFERED     NUMBER(1)    PERCENT(2)
                                                   ----------   ----------   ----------   ----------
<S>                                                <C>          <C>          <C>          <C>
James A. Hamilton................................      38,750       38,750            0         0
Jeffrey L. DuRocher(19)..........................     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
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(20)...................................   3,000,000    3,000,000            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(21)..................     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(22)............................   1,010,196    1,010,196            0         0
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    2,411,672            0         0
Venture Leasing and Lending Inc. ................     346,432      346,432            0         0
          Total Shares...........................  42,453,891   50,959,518
 
OFFICERS, DIRECTORS AND 5% STOCKHOLDERS:
Jack Tramiel(23).................................  12,594,616            0   12,594,616      12.0%
TimeWarner.......................................   8,670,000            0    8,670,000       8.3%
  Warner Communications, Inc.
  75 Rockefeller Plaza
  New York, NY 10019
Sirjang L. Tandon(24)............................   7,761,673            0    7,761,673       7.4%
David T. Mitchell(25)............................   4,010,196            0    4,010,196       3.8%
Jean D. Deleage(26)..............................   3,937,500            0    3,937,500       3.7%
Lip-Bu Tan(27)...................................   3,000,000            0    2,800,000       2.7%
Steven L. Kaczeus(28)............................     417,386            0      417,386         *
Kenneth D. Wing(29)..............................     322,917            0      322,917         *
Amit Chokshi(30).................................      41,667            0       41,667         *
Roger W. Johnson.................................          --            0           --         *
W. Virginia Walker(31)...........................     246,667            0      246,667         *
Rick R. Brantmeyer(32)...........................      50,000            0       50,000         *
All current directors and executive officers as a
  group (11 persons)(33).........................  32,391,997            0   32,391,997      30.9%
</TABLE>
 
- ---------------
 
   * 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
 
                                       49
<PAGE>   51
 
     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.
 
 (2) Based on 104,744,765 shares of Common Stock outstanding as of December 31,
1996.
 
 (3) Beneficial ownership is based upon: (i) conversion of all of the Series B
     Preferred Stock at $3.6125 per share of Common Stock (which price is equal
     to the average closing bid price for the five days preceding the Series B
     Closing); (ii) exercise of all of the Investor Warrants issuable upon
     conversion of the Series B Preferred Stock at $3.6125 per share of Common
     Stock; (iii) payment of dividends on the outstanding shares of Series B
     Preferred Stock in Common Stock; and (iv) further adjustments to the Series
     B Preferred Stock conversion ratio due to anti-dilution adjustments. See
     "Description of Capital Stock."
 
 (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 shown as of January 31, 1997. Beneficial ownership
     is based upon conversion of all of the Series C Preferred Stock at $2.94
     per share of Common Stock (which price is 85% of the average of the lowest
     sale prices of the Common Stock for each of the five days immediately
     preceding January 31, 1997). If all shares of Series C Preferred Stock held
     by such Selling Security Holder had been converted on January 31, 1997,
     (assuming conversion of all of the Series C Preferred Stock at $2.94 per
     share of Common Stock) the Company would have been obligated to issue
     8,494,371 shares of Common Stock in respect thereto. 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" 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. Citadel Limited Partnership is the managing general
     partner of Nelson Partners ("Nelson") and the trading manager of Olympus
     Securities, Ltd. ("Olympus") and consequently has voting control and
     investment discretion over securities held by both Nelson and Olympus. The
     ownership information for Nelson does not include the shares owned by
     Olympus and the ownership information for Olympus does not include the
     shares owned by Nelson.
 
 (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.
 
                                       50
<PAGE>   52
 
 (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.
 
(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 25,000 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) Includes 333,333 and 191,667 shares of Common Stock held by Needham Capital
     SBIC, L.P. and Needham Capital Partners, L.P., respectively. Needham
     Capital Partners, L.P. has investment and voting power with respect to the
     shares held by each of the foregoing investment funds.
 
(17) Includes 31,500, 5,000 and 22,500 shares of Common Stock held by WS
     Investment Company 95A, Atherton Ventures and WS Investment Company 95B,
     respectively. Mr. Rosati has investment and voting power with respect to
     the shares held by each of the foregoing investment funds. Mr. Rosati
     disclaims beneficial ownership of such shares except to the extent of his
     proportionate partnership interests therein.
 
(18) 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.
 
(19) 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.
 
(20) Includes 700,000, 600,000, 500,000, 300,000, 200,000, 200,000, 200,000,
     200,000 and 100,000 shares of Common Stock held by Walden Capital Partners
     II, L.P.; International Venture Capital Investment Corporation; Walden
     Investors; BI Walden Ventures Kedua Sdn Bhd; Seed Ventures II Limited; OWW
     Pacrim Investments Ltd; OCBC, Wearnes & Walden Investments (Singapore)
     Ltd.; Walden Ventures and Walden Technology Ventures II, L.P.,
     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.
 
(21) 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.
 
                                       51
<PAGE>   53
 
(22) Mr. Mitchell and Jintamai K. Mitchell beneficially own 4,010,196 shares of
     Common Stock as trustees of the Mitchell 1990 Rev. Trust UTA 3390, as
     amended. Of such shares, 1,010,196 are being offered hereby.
 
(23) Includes 11,597,315 shares held by Mr. Tramiel's wife. Also includes
     287,690 shares held by Mr. Tramiel's wife as trustee of trusts for the
     benefit of Mr. Tramiel's minor grandchildren. The remaining shares are held
     directly by Mr. Tramiel.
 
(24) 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.
     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.
 
(25) Please refer to (22).
 
(26) Please refer to (8).
 
(27) Please refer to (20).
 
(28) Includes 166,250 shares issuable pursuant to options exercisable within 60
     days of December 31, 1996.
 
(29) Includes 81,250 shares issuable pursuant to options exercisable within 60
     days of December 31, 1996.
 
(30) Includes 41,667 shares issuable pursuant to options exercisable within 60
     days of December 31, 1996.
 
(31) Includes 16,667 shares issuable pursuant to options exercisable within 60
     days of December 31, 1996.
 
(32) Includes 50,000 shares issuable pursuant to options exercisable within 60
     days of December 31, 1996.
 
(33) Includes 31,906,163 shares of Common Stock held by executive officers,
     directors and entities affiliated with certain directors and includes
     options to purchase 355,834 shares of Common Stock held by executive
     officers that are exercisable within 60 days of December 31, 1996. See
     footnotes (23), (24), (25), (26), (27), (28), (29) (30), (31) and (32).
 
                                       52
<PAGE>   54
 
                          DESCRIPTION OF CAPITAL STOCK
 
     The authorized capital stock of the Company consists of 150,000,000 shares
of Common Stock, 9,960,000 shares of undesignated, "blank check" preferred
stock, $.001 par value per share, 15,000 shares of Series B Preferred Stock and
25,000 shares of Series C 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 December 31, 1996, there were outstanding 104,744,765 shares of
Common Stock held of record by approximately 2,536 stockholders, options to
purchase 4,898,933 shares of Common Stock, and warrants to purchase 337,500
shares of Common Stock. Upon the completion of this offering, assuming full
conversion of the Series B Preferred Stock and Series C Preferred Stock at $2.94
per share (which price represents 85% of the average lowest trading price of the
Common Stock for the five days immediately preceding January 31, 1997) and full
exercise of the Warrants as of January 31, 1997, and assuming no exercise of
outstanding stock options or outstanding warrants after December 31, 1996, the
Company would have 118,373,262 shares of Common Stock outstanding. The Company
has agreed to seek stockholder approval to increase the authorized number of
Common Stock shares to provide a sufficient number of shares for issuance upon
conversion of the Series B Preferred Stock and the Series C Preferred Stock.
 
     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 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 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
 
                                       53
<PAGE>   55
 
into units consisting of Common Stock and Investor Warrants at the earlier of
the date of effectiveness of this 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) 100% of the average closing bid price for the
five days preceding the Series B Closing. 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. The holders of Series C
Preferred Stock have the right to convert all or a portion of the Series C
Preferred Stock into shares of Common Stock at the earlier of the date of
effectiveness of this Registration Statement or April 12, 1997. The Series C
Preferred Stock may be converted into Common Stock at a conversion price (the
"Series C Initial Conversion Price") equal to the lowest of (i) 85% (subject to
adjustment) of the average lowest sale price for the five days immediately
preceding the conversion date, (ii) $3.6125 (subject to adjustment) and (iii)
the average lowest sale price of the Company's Common Stock for the five trading
days preceding the date on which this Registration Statement is declared
effective (subject to adjustment). 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.
 
                                       54
<PAGE>   56
 
     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 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.
Michell'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.
 
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 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 GFL
Advantage Fund Limited and Genesee Fund Limited -- Portfolio B 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
 
                                       55
<PAGE>   57
 
$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, 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 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
 
                                       56
<PAGE>   58
 
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.
 
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 December 31, 1996, the Company
had approximately 104,744,765 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, upon
being declared effective, will register 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. 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 "Shares Eligible for Future Sale; Potential Dilution" and
"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
 
                                       57
<PAGE>   59
 
make private sales directly or through a broker or brokers, who may act as agent
or as principal. 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 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 1994 and for each
of the three 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 financial statements of JTS Corporation (pre-merger) and The Hard Disk
Drive Division of JTS Technology (India) Private Limited included in this
Prospectus have been audited by Arthur Andersen LLP, independent public
accountants, to the extent and for the periods indicated in their reports, and
are included herein in reliance upon the authority of said firm as experts in
giving said reports. Reference is made to said reports which include an
explanatory paragraph describing uncertainties concerning the ability of the
Company to continue as a going concern discussed in Note 1 to the financial
statements.
 
                                       58
<PAGE>   60
 
                             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.
 
                                       59
<PAGE>   61
 
                              JTS CORPORATION AND
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
 
                         INDEX TO FINANCIAL STATEMENTS
 
<TABLE>
<CAPTION>
                                                                                        PAGE
                                                                                        ----
<S>                                                                                     <C>
JTS CORPORATION (FORMERLY ATARI CORPORATION)
Report of Deloitte & Touche LLP.......................................................   F-2
Consolidated Balance Sheets as of December 31, 1995 and 1994..........................   F-3
Consolidated Statements of Operations for the years ended December 31, 1995, 1994 and
  1993................................................................................   F-4
Consolidated Statements of Shareholders' Equity for the years ended December 31, 1995,
  1994, and 1993......................................................................   F-5
Consolidated Statements of Cash Flows for the years ended December 31, 1995, 1994 and
  1993................................................................................   F-6
Notes to Consolidated Financial Statements............................................   F-7
Unaudited Consolidated Balance Sheets as of October 27, 1996, January 28, 1996 and
  December 31, 1995...................................................................  F-15
Unaudited Consolidated Statements of Operations for the Nine Months Ended October 27,
  1996 and September 30, 1995 and for the Transition Period...........................  F-16
Unaudited Consolidated Statements of Cash Flows for the Nine Months Ended October 27,
  1996 and September 30, 1995 and for the Transition Period...........................  F-17
Unaudited Notes to Consolidated Financial Statements..................................  F-18
 
JTS CORPORATION (PRE-MERGER)
Report of Arthur Andersen LLP.........................................................  F-20
Balance Sheets as of January 28, 1996 and January 29, 1995............................  F-21
Statements of Operations for the 52 weeks ended January 28, 1996 and for the period
  from inception (February 3, 1994) to January 29, 1995...............................  F-22
Statements of Stockholders' Deficit from inception (February 3, 1994) to
  January 28, 1996....................................................................  F-23
Statements of Cash Flows for the 52 weeks ended January 28, 1996 and for the period
  from inception (February 3, 1994) to January 29, 1995...............................  F-24
Notes to Financial Statements.........................................................  F-25
Unaudited Condensed Consolidated Balance Sheets as of July 28, 1996 and January 28,
  1996................................................................................  F-34
Unaudited Condensed Consolidated Statements of Operations for the Six Months Ended
  July 28, 1996 and July 30, 1995.....................................................  F-35
Unaudited Consolidated Statements of Cash Flows for the Six Months Ended July 28, 1996
  and July 30, 1995...................................................................  F-36
Unaudited Notes to Consolidated Financial Statements..................................  F-37
 
THE HARD DISK DRIVE DIVISION OF MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
Report of Arthur Andersen LLP.........................................................  F-38
Statements of Assets and Liabilities as of January 28, 1996 and January 31, 1995......  F-39
Statement of Revenues and Expenses for the period from February 1, 1995 to January 28,
  1996................................................................................  F-40
Statement of Cash Flows for the period from February 1, 1995 to January 28, 1996......  F-41
Notes to Financial Statements.........................................................  F-42
 
JTS CORPORATION
Unaudited Pro Forma Condensed Combined Financial Statements...........................  F-56
Unaudited Pro Forma Condensed Combined Statements of Operations.......................  F-57
Notes to Unaudited Pro Forma Condensed Combined Financial Statements..................  F-59
</TABLE>
 
                                       F-1
<PAGE>   62
 
                        REPORT OF DELOITTE & TOUCHE LLP
 
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 December 31,
1995 and 1994, and the related consolidated statements of operations,
shareholders' equity, and cash flows for each of the three years in the period
ended December 31, 1995. 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 JTS Corporation and
subsidiaries at December 31, 1995 and 1994, and the results of their operations
and their cash flows for each of the three years in the period ended December
31, 1995 in conformity with generally accepted accounting principles.
 
DELOITTE & TOUCHE LLP
 
San Jose, California
March 1, 1996
(April 8, 1996 as to Note 16)
 
                                       F-2
<PAGE>   63
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
                          CONSOLIDATED BALANCE SHEETS
               (IN THOUSANDS, EXCEPT SHARE AND PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                            DECEMBER 31,
                                                                       -----------------------
                                                                         1995          1994
                                                                       ---------     ---------
<S>                                                                    <C>           <C>
                                            ASSETS
CURRENT ASSETS:
  Cash and equivalents (including $700 and $4,450 held as restricted
     balances in 1995 and 1994)......................................  $  28,941     $  22,592
  Marketable securities..............................................     21,649        58,432
  Accounts receivable (less allowances for returns and doubtful
     accounts:
     1995, $4,221; 1994, $1,957).....................................      2,468         9,262
  Inventories........................................................     10,934        18,185
  Other current assets...............................................      1,134         4,717
                                                                       ---------     ---------
          Total current assets.......................................     65,126       113,188
GAME SOFTWARE DEVELOPMENT COSTS -- Net...............................        758         5,145
EQUIPMENT AND TOOLING -- Net.........................................        671         1,315
REAL ESTATE HELD FOR SALE............................................     10,468        10,741
OTHER ASSETS.........................................................        546           653
                                                                       ---------     ---------
          TOTAL......................................................  $  77,569     $ 131,042
                                                                       =========     =========
</TABLE>
 
                      LIABILITIES AND SHAREHOLDERS' EQUITY
 
<TABLE>
<S>                                                                    <C>           <C>
CURRENT LIABILITIES:
  Accounts payable...................................................  $   4,954     $  15,341
  Accrued liabilities................................................      5,088         5,177
                                                                       ---------     ---------
          Total current liabilities..................................     10,042        20,518
                                                                       ---------     ---------
LONG-TERM OBLIGATIONS................................................     42,354        43,454
                                                                       ---------     ---------
COMMITMENTS AND CONTINGENT LIABILITIES (Note 14)
SHAREHOLDERS' EQUITY:
  Preferred stock, $.01 par value -- authorized, 10,000,000 shares;
     none outstanding................................................         --            --
  Common stock, $.01 par value -- authorized, 100,000,000 shares;
     outstanding: 1995, 63,687,118 shares; 1994, 63,648,535 shares...        637           636
  Additional paid-in capital.........................................    196,209       196,138
  Unrealized net gain on marketable securities.......................      7,088           542
  Accumulated translation adjustments................................       (663)       (1,724)
  Accumulated deficit................................................   (178,098)     (128,522)
                                                                       ---------     ---------
     Total shareholders' equity......................................     25,173        67,070
                                                                       ---------     ---------
          TOTAL......................................................  $  77,569     $ 131,042
                                                                       =========     =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-3
<PAGE>   64
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
                     CONSOLIDATED STATEMENTS OF OPERATIONS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                  YEARS ENDED DECEMBER 31,
                                                             ----------------------------------
                                                               1995         1994         1993
                                                             --------     --------     --------
<S>                                                          <C>          <C>          <C>
REVENUES...................................................  $ 14,626     $ 38,748     $ 29,108
COST AND EXPENSES:
  Cost of revenues.........................................    44,234       35,200       42,768
  Research and development.................................     5,410        5,775        4,876
  Marketing and distribution...............................    12,726       14,651        8,980
  General and administrative...............................     5,921        7,169        7,558
  Restructuring charges....................................        --           --       12,425
                                                             --------     --------     --------
          Total operating expenses.........................    68,291       62,795       76,607
                                                             --------     --------     --------
OPERATING LOSS.............................................   (53,665)     (24,047)     (47,499)
Settlements of patent litigation...........................        --       32,062           --
Exchange gain (loss).......................................        13        1,184       (2,234)
Other income...............................................     2,670          484          854
Interest income............................................     3,133        2,015        2,039
Interest expense...........................................    (2,309)      (2,304)      (2,290)
                                                             --------     --------     --------
          Income (loss) before income taxes................   (50,158)       9,394      (49,130)
Income tax credit..........................................        --           --          264
                                                             --------     --------     --------
INCOME (LOSS) BEFORE EXTRAORDINARY CREDIT..................   (50,158)       9,394      (48,866)
Extraordinary credit -- gain on extinguishment of 5 1/4%
  convertible subordinated debentures......................       582           --           --
                                                             --------     --------     --------
NET INCOME (LOSS)..........................................  $(49,576)    $  9,394     $(48,866)
                                                             ========     ========     ========
EARNINGS (LOSS) PER COMMON SHARE:
  Income (loss) before extraordinary credit................  $  (0.79)    $   0.16     $  (0.85)
  Net income (loss)........................................  $  (0.78)    $   0.16     $  (0.85)
  Number of shares used in computations....................    63,697       58,962       57,148
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-4
<PAGE>   65
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                             NOTES
                                                           RECEIVABLE                     UNREALIZED
                                                              FROM                         NET GAIN
                        COMMON STOCK        ADDITIONAL      SALE OF       ACCUMULATED         ON
                      -----------------      PAID-IN         COMMON       TRANSLATION     MARKETABLE     ACCUMULATED
                      SHARES     AMOUNT      CAPITAL         STOCK        ADJUSTMENTS     SECURITIES       DEFICIT        TOTAL
                      ------     ------     ----------     ----------     -----------     ----------     -----------     --------
<S>                   <C>        <C>        <C>            <C>            <C>             <C>            <C>             <C>
BALANCES, JANUARY
  1, 1993..........   57,137      $571       $142,315         $(19)         $(3,234)        $   --        $ (89,050)     $ 50,583
Stock options
  exercised........       89         1            191                                                                         192
Common stock
  repurchased......      (11)                      (9)           9                                                             --
Collection of notes
  receivable.......                                              7                                                              7
Translation
  adjustments......                                                           2,438                                         2,438
Net loss...........                                                                                         (48,866)      (48,866)
                      ------      ----       --------         ----          -------         ------           ------      ---------
 
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 net gain
  on marketable
  securities.......                                                                            542                            542
Net income.........                                                                                           9,394         9,394
                      ------      ----       --------         ----          -------         ------           ------      ---------
 
BALANCES, DECEMBER
  31, 1994.........   63,649       636        196,138           --           (1,724)           542         (128,522)       67,070
Stock options
  exercised........       82         1            109                                                                         110
Stock
  repurchased......      (44)                     (38)                                                                        (38)
Translation
  adjustments......                                                           1,061                                         1,061
Unrealized net gain
  on marketable
  securities.......                                                                          6,546                          6,546
Net loss...........                                                                                         (49,576)      (49,576)
                      ------      ----       --------         ----          -------         ------           ------      ---------
 
BALANCES, DECEMBER
  31, 1995.........   63,687      $637       $196,209         $ --          $  (663)        $7,088        $(178,098)     $ 25,173
                      ======      ====       ========         ====          =======         ======           ======      =========
</TABLE>
 
                See notes to consolidated financial statements.
 
                                       F-5
<PAGE>   66
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
                     CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                                    YEARS ENDED DECEMBER 31,
                                                                                               ----------------------------------
                                                                                                 1995         1994         1993
                                                                                               --------     --------     --------
<S>                                                                                            <C>          <C>          <C>
OPERATING ACTIVITIES:
  Net income (loss)..........................................................................  $(49,576)    $  9,394     $(48,866)
  Adjustments to reconcile net income (loss) to net cash provided (used) by operating
    activities:
  Gain from extinguishment of 5 1/4% convertible subordinated debentures.....................      (582)          --           --
  Depreciation and amortization..............................................................     1,970        2,619          361
  Provision for production tooling...........................................................       300           --           --
  Provision for doubtful accounts............................................................        50          194          232
  Provision for sales returns and allowances.................................................     5,028        1,563          457
  Provision for restructuring................................................................        --           --       12,425
  Gain on sale of marketable securities......................................................    (2,377)          --         (324)
  Provision for inventory valuation..........................................................    12,640        5,362       18,100
  Utilization of advertising barter credits..................................................     3,179           --           --
  Write-off of game software development costs...............................................    16,578          804           --
  Changes in operating assets and liabilities:
    Accounts receivable......................................................................     1,637       (5,383)      16,863
    Inventories..............................................................................    (5,389)     (14,177)         951
    Other assets.............................................................................       395         (336)       3,178
    Accounts payable.........................................................................   (10,372)       3,763       (4,925)
    Accrued liabilities......................................................................       (42)        (660)     (15,881)
                                                                                               --------     --------     --------
  Net cash provided (used) by operations.....................................................   (26,561)       3,143      (17,429)
                                                                                               --------     --------     --------
INVESTING ACTIVITIES:
  Sales and maturities of marketable securities..............................................    55,703           --        2,525
  Purchase of marketable securities..........................................................    (9,997)     (50,000)          --
  Purchases of property, equipment and tooling...............................................      (782)      (1,207)        (663)
  Sale of property...........................................................................        29        7,543           --
  Game software development costs............................................................   (12,791)      (5,810)        (789)
  Other assets...............................................................................       107          482          541
                                                                                               --------     --------     --------
  Net cash provided (used) by investing activities...........................................    32,269      (48,992)       1,614
                                                                                               --------     --------     --------
FINANCING ACTIVITIES:
  5 1/4% convertible subordinated debentures extinguished....................................      (518)          --           --
  Repayments of borrowings...................................................................        --       (7,642)        (259)
  Issuance of common stock, net..............................................................        72       53,708          199
                                                                                               --------     --------     --------
  Net cash provided (used) by financing activities...........................................      (446)      46,066          (60)
                                                                                               --------     --------     --------
EFFECT OF EXCHANGE RATE CHANGES ON CASH AND EQUIVALENTS......................................     1,087         (684)        (356)
                                                                                               --------     --------     --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS..............................................     6,349         (467)     (16,231)
CASH AND EQUIVALENTS:
  Beginning of year..........................................................................    22,592       23,059       39,290
                                                                                               --------     --------     --------
  End of year................................................................................  $ 28,941     $ 22,592     $ 23,059
                                                                                               ========     ========     ========
OTHER CASH FLOW INFORMATION:
  Interest paid..............................................................................  $  2,309     $  2,303     $  3,023
                                                                                               ========     ========     ========
  Income taxes refunded......................................................................  $     --     $   (426)    $   (225)
                                                                                               ========     ========     ========
NONCASH INVESTING AND FINANCING ACTIVITIES:
  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-6
<PAGE>   67
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
 
1. COMPANY
 
     Nature of Operations -- The Company designs and markets interactive
multimedia entertainment systems and related software and peripheral products.
Manufacture of these products is performed by third parties. The principal
methods of distribution are through mass market retailers, consumer electronic
specialty stores and distributors of electronic products.
 
     Product Focus -- Since 1992, the Company has focused its research and
development effort on its 64-bit Jaguar interactive multimedia entertainment
system. This product was introduced in 1993 and, in 1995 and 1994, 68% and 76%
of revenues, respectively, were associated with this product. Sales of the
Jaguar in 1995 were disappointing and the Company is currently test marketing
different price points and software bundles for the Jaguar in an attempt to sell
its substantial inventory of such products.
 
     In December 1994, the Company planned price reductions beginning in early
1995 and recognized the impact of this decision on finished and in-process
inventory through a write-down of inventory of $3.6 million, which is included
in cost of sales in the fourth quarter of 1994. In December 1995, the Company
planned further price reductions beginning in early 1996 and recognized the
impact of this decision through a $10.9 million write-down of inventory, which
is included in cost of sales in the fourth quarter of 1995.
 
     The Company continues to carry limited quantities of its older 8-bit and
16-bit video games and computer product lines. As a result of rapid
technological change and intense competition, the Company wrote down inventories
of these products by $18.1 million in 1993 which was included in cost of sales.
 
     Estimates -- The preparation of financial statements in accordance with
generally accepted accounting principles requires management to make estimates
and assumptions that affect recorded amounts of assets, liabilities, revenues
and expenses as of the dates and for the periods presented. In connection with
the change of the Company's focus, measurement of assets and liabilities is
dependent upon management's ability to accurately predict future operating
results. Actual results could differ from these estimates.
 
     Restructuring -- The Company has active operations in the United States and
the United Kingdom. During 1993 and 1992, the Company significantly restructured
its operations around the world, closing operations in Australia and the Far
East, in several European countries and in Canada and Mexico. These operational
closures resulted in the bankruptcy of subsidiaries in Australia and Germany and
may result in the voluntary or involuntary liquidation or bankruptcy of other
subsidiary companies. Charges for restructuring have been separately reported in
the consolidated statements of operations for 1993. The remaining accruals of
$351,000 at December 31, 1995 relate to employee benefits in Italy and lease
obligations in the Netherlands.
 
2. SIGNIFICANT ACCOUNTING POLICIES
 
     Principles of Consolidation -- The consolidated financial statements
include the Company and its subsidiaries. All transactions and balances between
the companies are eliminated.
 
     Cash and Equivalents -- Cash equivalents are stated at cost, which
approximates market value, have maturities not exceeding ninety days upon
acquisition and generally consist of certificates of deposit, time deposits,
treasury notes and commercial paper.
 
     Marketable Securities -- Effective January 1, 1994, the Company adopted
Statement of Financial Accounting Standards (SFAS) No. 115, "Accounting for
Certain Investments in Debt and Equity Securities." Marketable securities are
carried as available-for-sale securities and reported at the fair market value.
The cumulative effect of adoption of SFAS 115 as of January 1, 1994 was not
material. Unrealized gains and losses are reported as a separate component of
shareholders' equity. Realized gains and losses are recorded in the statements
of operations and realized gains were $2.4 million in 1995. The cost of
securities sold is based on average cost.
 
                                       F-7
<PAGE>   68
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Inventories -- Inventories are stated at the lower of cost or market. Cost
is computed using standard costs which approximate actual cost on a first-in,
first-out basis. Market for each of the Company's product lines is determined by
reference to expected sales prices less direct selling expenses.
 
     Prepaid Advertising -- Included in other current assets at December 31,
1994 is $3.2 million of prepaid advertising resulting from a barter transaction.
The amount recorded as prepaid advertising equals the carrying value of certain
inventory exchanged for advertising credits. The Company expensed the prepaid
advertising as utilized during 1995.
 
     Equipment and Tooling -- Equipment and tooling are stated at cost.
Depreciation on equipment is computed using the straight-line method based on
estimated useful lives of the assets of two to five years. Tooling is
depreciated on a units of production basis. Leasehold improvements are amortized
over the estimated useful life or lease term, as appropriate. Fully depreciated
assets, and related depreciation, are excluded from the consolidated financial
statements.
 
     Real Estate Held for Sale -- Real property associated with closed
operations in the U.S. is stated at estimated market value as determined by
recent valuations, appraisals or pending sales offers.
 
     Revenue Recognition -- Sale of consoles, software game cartridges and
related products are recorded as revenue at the time of shipment to customers.
Concurrently, the Company establishes reserves for estimated returns, which are
recorded as a reduction of sales, and for cooperative advertising allowances,
which are recorded as marketing and distribution expense. Royalty revenues are
recognized when earned and collection is probable.
 
     Income Taxes -- The Company adopted SFAS No. 109 "Accounting for Income
Taxes" in the first quarter of 1993 which requires an asset and liability method
for financial accounting and reporting of income taxes. The impact of the
adoption of SFAS 109 was not material.
 
     Foreign Currency Translation -- Assets and liabilities of operations
outside the United States are translated into United States dollars using
current exchange rates, and the effects of foreign currency translation
adjustments are deferred and included as a component of shareholders' equity.
 
     Income (Loss) per Common Share -- Per share amounts are computed based on
the weighted average number of common and dilutive common equivalent shares
(stock options) outstanding during each period. 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 Company uses a 52/53 week fiscal year which ends on the
Saturday closest to December 31. All fiscal years presented contain 52 weeks.
For simplicity of presentation, the date December 31 is used to represent the
fiscal year end.
 
     Reclassifications -- Certain items have been reclassified in the 1994 and
1993 financial statements to conform to the 1995 presentation and had no effect
on operating results or shareholders' equity.
 
     Recently Issued Pronouncements -- In October 1995, the Financial Accounting
Standards Board issued FASB No. 123, "Accounting for Stock-Based Compensation."
The new standard defines a fair value method of accounting for stock options and
other equity instruments, such as stock purchase plans. Under this method,
compensation cost is measured based on the fair value of the stock award when
granted and is recognized as an expense over the service period, which is
usually the vesting period. This standard will be effective for the Company
beginning in 1996, and requires measurement of awards made beginning in 1995.
The new standard permits companies to continue to account for equity
transactions with employees under existing accounting rules, but requires
disclosure in a note to the financial statements of the pro forma net income and
earnings per share as if the Company had applied the new method of accounting.
The Company intends to follow these
 
                                       F-8
<PAGE>   69
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
disclosure requirements for its employee stock plans. As a result, adoption of
the new standard will not impact reported earnings or earnings per share, and
will have no effect on the Company's cash flows.
 
3. FINANCIAL INSTRUMENTS
 
     Marketable Securities -- Marketable securities available for sale consist
of (in thousands):
 
<TABLE>
<CAPTION>
                                                  DECEMBER 31, 1995                     DECEMBER 31, 1994
                                          ----------------------------------    ----------------------------------
                                                                    GROSS                                 GROSS
                                          AMORTIZED    MARKET     UNREALIZED    AMORTIZED    MARKET     UNREALIZED
                 ISSUE                      COST        VALUE       GAINS         COST        VALUE       GAINS
- ----------------------------------------  ---------    -------    ----------    ---------    -------    ----------
<S>                                       <C>          <C>        <C>           <C>          <C>        <C>
Equity securities --
  Dixon common stock....................   $ 4,565     $11,606      $7,041       $ 7,890     $ 8,432     $    542
Government securities --
  Federal Home Loan Bank................     4,993       5,026          33            --          --           --
  Federal Home Loan Mortgage Corp.......     5,003       5,017          14            --          --           --
Foreign government debt securities --
  Eurodollar notes......................        --          --          --        50,000      50,000           --
                                             -----     -------     -------        ------
    Total marketable securities.........   $14,561     $21,649      $7,088       $57,890     $58,432     $    542
                                             =====     =======     =======        ======
</TABLE>
 
     The contractual maturities of the government securities range from two to
four years. The Eurodollar notes matured during 1995.
 
     Concentration of Credit Risk -- The Company sells to mass market retailers,
consumer electronic specialty stores and to distributors of electronic products
throughout the United States and Europe. The Company makes ongoing credit
evaluations of customers and, at times, requires letters of credit from some
foreign customers. Sales to foreign customers are generally stated in the
currency of the customer. To date, the Company has not entered into hedges of
these foreign currency exposures.
 
     Fair Value of Financial Instruments -- In accordance with the provisions of
SFAS No. 107, "Disclosure About Fair Value of Financial Instruments," which
requires the disclosure of fair value information about both on and off balance
sheet financial instruments where it is practicable to estimate the value, the
Company has estimated the fair value of its financial instruments. The estimated
fair value of the 5 1/4% convertible subordinated debentures at December 31,
1995 was approximately $20 million based primarily on quoted market prices. The
carrying amounts of the remainder of the Company's financial instruments,
including cash and equivalents, marketable securities, accounts receivable and
accounts payable, approximate fair values due to their short maturities.
 
4. INVENTORIES
 
     Inventories at December 31 consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                        1995        1994
                                                                       -------     -------
    <S>                                                                <C>         <C>
    Finished goods...................................................  $ 9,927     $15,799
    Raw materials and work-in-process................................    1,007       2,386
                                                                       -------     -------
         Total.......................................................  $10,934     $18,185
                                                                       =======     =======
</TABLE>
 
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
 
                                       F-9
<PAGE>   70
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
amounts paid to third parties, primarily as prepaid licenses, in connection with
game development for the Jaguar. The Company amortizes 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.
 
6. EQUIPMENT AND TOOLING
 
     Equipment and tooling at December 31 consists of the following (in
thousands):
 
<TABLE>
<CAPTION>
                                                                         1995       1994
                                                                        ------     -------
    <S>                                                                 <C>        <C>
    Equipment and tooling.............................................  $1,526     $ 1,874
    Furniture and fixtures............................................     198         708
    Leasehold improvements............................................      --          43
                                                                        ------     -------
    Total.............................................................   1,724       2,625
    Accumulated depreciation and amortization.........................    (753)     (1,310)
    Reserve for production tooling....................................    (300)         --
                                                                        ------     -------
    Equipment and tooling -- net......................................  $  671     $ 1,315
                                                                        ======     =======
</TABLE>
 
7. REAL ESTATE HELD FOR SALE
 
     Property held for sale at December 31, 1995 consists of nine properties in
California and Texas, from the discontinued consumer electronics and home
entertainment products operation. Certain of the properties have rental tenants,
although all properties are available for sale. Rental income, net of rental
expense and depreciation, is included in other income (expense) and was not
material. Disposals in 1994 represented the Company's building in Germany and
land and building in France, which were disposed of with no significant gain or
loss.
 
8. ACCRUED LIABILITIES
 
     Accrued liabilities at December 31 consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                      1995       1994
                                                                     ------     ------
        <S>                                                          <C>        <C>
        Accrued interest...........................................  $1,483     $1,513
        Accrued game software development costs....................   1,525         --
        Accrued restructuring charge...............................     351        719
        Accrued royalties..........................................      28        320
        Other......................................................   1,701      2,625
                                                                     ------     ------
        Total......................................................  $5,088     $5,177
                                                                     ======     ======
</TABLE>
 
9. LETTERS OF CREDIT AND RESTRICTED CASH
 
     At December 31, 1995, cash balances of $700,000 were collateral for
outstanding commercial letters of credit associated with inventory components
and software development. At December 31, 1994, cash balances of $4.5 million
were collateral for outstanding letters of credit.
 
                                      F-10
<PAGE>   71
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
10. LONG-TERM DEBT OBLIGATIONS
 
     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. At December 31, 1995, 2,596,414 shares of common stock were
reserved for issuance upon conversion. Default with respect to other
indebtedness of Atari Corporation 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 credit of $582,000.
 
     Term Loans on Real Estate in Europe -- At December 31, 1993, the Company
had two secured term loans outstanding totaling $7.5 million for its building in
Germany and a term loan of $2.0 million for its land and building in France.
These loans were repaid or exchanged in 1994 from the sale or transfer of the
properties.
 
11. 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.
 
12. INCOME TAXES
 
     The credit for income taxes consists of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                1995     1994     1993
                                                                ----     ----     -----
        <S>                                                     <C>      <C>      <C>
        Current:
          Federal.............................................   $--      $--     $  --
          Foreign.............................................   --       --       (264)
          State...............................................   --       --         --
                                                                 --       --
                                                                                  -----
        Income tax credit.....................................   $--      $--     $(264)
                                                                 ==       ==      =====
</TABLE>
 
     At December 31, 1995, the Company has a U.S. income tax operating loss
carryforward of $165 million which expires in 2006 through 2010, a research and
development tax credit carryforward of $1.8 million which expires in 2002
through 2010, and a California income tax operating loss carryforward of $60
million which expires as follows: $16.4 million in 1997, $16.7 million in 1998,
$1.6 million in 1999 and $21.8 million in 2000.
 
                                      F-11
<PAGE>   72
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     The effective income tax rates for 1995, 1994 and 1993 were 0%, 0%, and
(1)%, respectively, and differ from the federal statutory rate of 35% as follows
(in thousands):
 
<TABLE>
<CAPTION>
                                                            1995        1994         1993
                                                          --------     -------     --------
    <S>                                                   <C>          <C>         <C>
    Computed at federal statutory rates.................  $(17,402)    $ 3,288     $(17,103)
    Valuation allowance.................................    18,604      (3,288)      16,821
    Effect of foreign tax rates different than statutory
      rates and utilization of foreign loss
      carrybacks........................................        --          --           16
    Other...............................................    (1,202)         --            2
                                                          --------     -------     --------
    Income tax credit...................................  $     --     $    --     $   (264)
                                                          ========     =======     ========
</TABLE>
 
     The components of the net deferred tax asset at December 31 consist of (in
thousands):
 
<TABLE>
<CAPTION>
                                                                   1995         1994
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Deferred tax assets:
        U.S. operating loss carryforwards......................  $ 57,706     $ 42,149
        State operating loss carryforwards.....................     3,820        2,321
        Capital loss carryforwards.............................     1,035        1,804
        Research and development tax credit carryforwards......     1,813        1,370
        Inventory reserves.....................................     3,237        2,781
        Restructuring charges..................................        50          239
        Capitalized game software development costs............     3,022           --
        Other items............................................     4,411        5,826
                                                                 --------     --------
        Subtotal...............................................    75,094       56,490
        Valuation allowance....................................   (75,094)     (56,490)
                                                                 --------     --------
        Net deferred tax asset.................................  $     --     $     --
                                                                 ========     ========
</TABLE>
 
     Due to the uncertainty surrounding the timing and realization of the
benefits of its favorable tax attributes in future years, the Company has
established a valuation allowance to offset its net deferred tax assets.
 
     Current federal and state tax law includes certain provisions limiting the
use of net operating loss carryforwards in the event of certain defined changes
in stock ownership. The annual use of the Company's net operating loss
carryforwards could be limited according to these provisions, and there can be
no assurance that such limitations will not result in the loss of carryforward
benefits during the carryforward period.
 
13. STOCK OPTIONS
 
     The Company's stock option plan and restricted stock plan provide for the
issuance of up to 3,000,000 shares of common stock through the issuance of
incentive stock options to employees and nonqualified stock options and
restricted stock to employees, directors and consultants. Under the plans, stock
options or restricted stock may be granted at not less than fair market value as
determined by the Board of Directors. Stock options become exercisable as
established by the Board (generally ratably over five years) and expire up to
ten years from date of grant. The Company's right to repurchase restricted stock
lapses over a maximum period of five years. At December 31, 1995, options for
551,925 shares were exercisable and options for 602,310 shares were available
for future grant. At December 31, 1995, no restricted stock under the restricted
stock plan had been issued.
 
                                      F-12
<PAGE>   73
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
     Additional information with respect to the stock option plan is as follows:
 
<TABLE>
<CAPTION>
                                                                  OPTION PRICE
                                                                RANGE PER SHARE
                                                 NUMBER OF     ------------------
                                                  OPTIONS       LOW         HIGH         TOTAL
                                                 ---------     ------       -----     -----------
    <S>                                          <C>           <C>     <C>  <C>       <C>
    Outstanding, January 1, 1993...............    970,400     $1.500    -  $7.50     $ 3,131,450
    Granted....................................    535,583      0.875    -   4.75       1,045,093
    Exercised..................................    (89,300)     0.875    -   3.00        (195,463)
    Cancelled..................................   (222,500)     0.875    -   6.00        (831,625)
                                                 ---------
    Outstanding, December 31, 1993.............  1,194,183      0.875    -   7.50       3,149,455
    Granted....................................    289,500      2.250    -   7.00       1,467,750
    Exercised..................................   (157,065)     0.875    -   6.25        (372,403)
    Cancelled..................................    (18,160)     1.675    -   7.50         (93,980)
                                                 ---------
    Outstanding, December 31, 1994.............  1,308,458      0.875    -   7.00       4,150,822
    Granted....................................  1,487,000      1.438    -   3.81       3,970,814
    Exercised..................................    (82,333)     0.875    -   2.00        (110,250)
    Cancelled..................................   (615,600)     0.875    -   7.00      (2,135,175)
                                                 ---------
    Outstanding, December 31, 1995.............  2,097,525     $0.875    -  $5.25     $ 5,876,211
                                                 =========
</TABLE>
 
14. SEGMENT INFORMATION
 
     The Company operates in one industry segment -- the design and sale of
consumer electronic products.
 
     The Company's foreign operations at December 31, 1995 consist of sales and
distribution facilities in Europe. Transfers between geographic areas are
accounted for at amounts generally above cost and in accordance with the rules
and regulations of the respective governing tax authorities. Corporate assets
are primarily cash and equivalents, marketable securities and real estate held
for sale.
 
     The following tables present a summary of operations by geographic region
(in thousands):
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                     ----------------------------------
                                                       1995         1994         1993
                                                     --------     --------     --------
        <S>                                          <C>          <C>          <C>
        Revenues from unaffiliated customers:
        North America..............................  $  8,163     $ 23,158     $  7,390
        Export sales from North America............     1,868        8,538           --
        Europe.....................................     4,595        7,052       18,548
        Other......................................        --           --        3,170
                                                      -------      -------      -------
                  Total............................  $ 14,626     $ 38,748     $ 29,108
                                                      =======      =======      =======
        Transfer between geographic areas
          (eliminated in consolidation):
        North America..............................  $  4,041     $  1,046     $ 17,781
        Europe.....................................        68        1,895       25,284
        Other......................................        --           --          102
                                                      -------      -------      -------
                  Total............................  $  4,109     $  2,941     $ 43,167
                                                      =======      =======      =======
</TABLE>
 
                                      F-13
<PAGE>   74
 
                  JTS CORPORATION (FORMERLY ATARI CORPORATION)
 
           NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                          YEARS ENDED DECEMBER 31,
                                                       1995         1994         1993
                                                     -------      -------      -------
        <S>                                          <C>          <C>          <C>
        Operating loss:
        North America..............................  $(51,036)    $(21,600)    $(14,025)
        Europe.....................................    (2,629)      (2,447)     (19,741)
        Other......................................        --           --      (13,733)
                                                      -------      -------      -------
                  Total............................  $(53,665)    $(24,047)    $(47,499)
                                                      =======      =======      =======
        Identifiable assets at December 31:
        North America..............................  $ 14,588     $ 37,627     $ 17,369
        Europe.....................................     1,856        1,650        5,801
        Corporate assets...........................    61,125       91,765       51,663
                                                      -------      -------      -------
                  Total............................  $ 77,569     $131,042     $ 74,833
                                                      =======      =======      =======
</TABLE>
 
     No single customer accounted for more than 10% of total revenues for the
years ended December 31, 1995, 1994 or 1993.
 
15. COMMITMENTS AND CONTINGENT LIABILITIES
 
     The Company leases various facilities and equipment under noncancellable
operating lease arrangements. These leases generally provide renewal options of
five additional years. Minimum future lease payments under noncancellable
operating leases as of December 31, 1995 are as follows (in thousands):
 
<TABLE>
                <S>                                                   <C>
                1996................................................  $  670
                1997................................................     460
                1998................................................     183
                1999................................................      85
                2000................................................      74
                                                                      ------
                          Total minimum lease payments..............  $1,472
                                                                      ======
</TABLE>
 
     Rent expense for operating leases was $1,193,000, $1,218,000 and $1,251,000
for the years 1995, 1994 and 1993, respectively.
 
     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.
 
16. SUBSEQUENT EVENT
 
     On February 12, 1996, the Company entered into a merger agreement with JT
Storage, Inc. (JTS) providing for the merger of the Company and JTS. On April 8,
1996, the merger agreement was amended and restated. JTS was incorporated on
February 3, 1994 to develop, market and manufacture hard disk drives. The merger
requires shareholder approval and is expected to be consummated in the second
quarter of 1996. In connection with the merger, the Company extended a bridge
loan to JTS in the amount of $25.0 million maturing on September 30, 1996 with a
stated interest rate of 8 1/2% per annum. If the merger is not consummated, the
bridge loan is convertible at the option of Atari or JTS into shares of JTS
Series A Preferred Stock and warrants to acquire JTS Series A Preferred Stock,
subject to certain conditions.
 
                                      F-14
<PAGE>   75
 
                                JTS CORPORATION
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                      (IN THOUSANDS, EXCEPT SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                         JANUARY 28,     DECEMBER 31,
                                                                            1996             1995
                                                         OCTOBER 27,     -----------     ------------
                                                            1996         (UNAUDITED)
                                                         -----------
                                                         (UNAUDITED)
<S>                                                      <C>             <C>             <C>
                                               ASSETS
CURRENT ASSETS:
  Cash and cash equivalents (including $1,400, $700 and
     $700 held as restricted balances at October 27,
     1996, January 28, 1996, and December 31, 1995,
     respectively).....................................   $   10,594      $   31,790      $   28,941
  Marketable securities................................           --          16,460          21,649
  Accounts receivable (less allowances for doubtful
     accounts of $2,972, $4,036 and $4,221 at October
     27, 1996, January 28, 1996 and December 31, 1995,
     respectively).....................................       12,854           2,784           2,468
  Inventories (See Note 3).............................       15,602           5,666          10,934
  Other current assets.................................        3,370           1,895           1,134
                                                           ---------       ---------       ---------
     Total current assets..............................       42,420          58,595          65,126
Equipment and leasehold improvements...................       26,832             599           1,429
Real estate held for sale..............................           --          10,443          10,468
Acquired technology (See Note 2).......................       21,580              --              --
Goodwill (See Note 2)..................................       17,314              --              --
Other assets...........................................          472             538             546
                                                           ---------       ---------       ---------
TOTAL ASSETS...........................................   $  108,618      $   70,175      $   77,569
                                                           =========       =========       =========
                                LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
  Bank line of credit..................................   $    9,932      $       --      $       --
  Accounts payable.....................................       33,231           4,317           4,954
  Other accrued liabilities............................        8,785           5,862           5,088
  Current portion of long-term obligations.............        2,242              --              --
                                                           ---------       ---------       ---------
TOTAL CURRENT LIABILITIES..............................       54,191          10,178          10,042
                                                           ---------       ---------       ---------
LONG-TERM OBLIGATIONS..................................       54,088          42,354          42,354
                                                           ---------       ---------       ---------
SHAREHOLDERS' EQUITY:
  Preferred stock, $.01 par value -- authorized,
     10,000,000 shares; none outstanding...............           --              --              --
  Common stock, $.01 par value -- authorized,
     150,000,000 shares; (outstanding: 104,689,064,
     63,690,318 and
     63,687,118 shares at October 27, 1996, January 28,
     1996 and December 31, 1995, respectively).........        1,047             637             637
  Additional paid-in capital...........................      310,875         196,213         196,209
  Notes receivable from shareholders...................       (2,510)             --              --
  Unrealized gain (loss) on marketable securities......           --           3,930           7,088
  Accumulated translation adjustments..................           --            (694)           (663)
  Accumulated deficit..................................     (309,073)       (182,443)       (178,098)
                                                           ---------       ---------       ---------
     Total Shareholders' Equity........................          340          17,643          25,173
                                                           ---------       ---------       ---------
                                                          $  108,618      $   70,175      $   77,569
                                                           =========       =========       =========
</TABLE>
 
           (See Condensed Notes to Consolidated Financial Statements)
 
                                      F-15
<PAGE>   76
 
                                JTS CORPORATION
 
                CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS
       FOR THE NINE MONTHS ENDED OCTOBER 27, 1996 AND SEPTEMBER 30, 1995
         AND FOR THE ONE MONTH TRANSITION PERIOD ENDED JANUARY 28, 1996
                (AMOUNTS IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
                                   UNAUDITED
 
<TABLE>
<CAPTION>
                                                                NINE MONTHS ENDED           ONE MONTH
                                                           ----------------------------   PERIOD ENDED
                                                           OCTOBER 27,    SEPTEMBER 30,    JANUARY 28,
                                                              1996            1995            1996
                                                           -----------    -------------   -------------
<S>                                                        <C>            <C>             <C>
NET SALES................................................   $   35,056      $  11,824        $   735
                                                               =======        =======        =======
COST AND EXPENSES:
  Cost of sales..........................................       39,122         18,534          6,156
  Acquired in-process research and development...........      110,012             --             --
  Amortization of existing technology....................        1,962             --             --
  Research and development...............................        6,262          4,552            161
  Selling, general and administrative....................        5,705         12,587          1,089
                                                               -------        -------        -------
Total operating expenses.................................      163,063         35,673          7,406
                                                               -------        -------        -------
OPERATING LOSS...........................................     (128,007)       (23,849)        (6,671)
Exchange gains (loss)....................................         (604)            (2)          (115)
Other income (loss), net.................................        3,707          1,174          2,533
Interest income..........................................          673          2,536            112
Interest expense.........................................       (2,415)        (1,740)          (189)
                                                               -------        -------        -------
NET INCOME (LOSS)........................................   $ (126,646)     $ (21,881)       $(4,330)
                                                               =======        =======        =======
LOSS PER COMMON SHARE....................................   $    (1.55)     $   (0.34)       $ (0.07)
                                                               =======        =======        =======
Number of shares used in computations....................       81,678         63,643         63,687
                                                               =======        =======        =======
</TABLE>
 
           (See Condensed Notes to Consolidated Financial Statements)
 
                                      F-16
<PAGE>   77
 
                                JTS CORPORATION
 
                CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
                                  (UNAUDITED)
 
<TABLE>
<CAPTION>
                                                                  NINE MONTHS ENDED         ONE MONTH
                                                             ---------------------------   PERIOD ENDED
                                                             OCTOBER 27,   SEPTEMBER 30,   JANUARY 28,
                                                                1996           1995            1996
                                                             -----------   -------------   ------------
<S>                                                          <C>           <C>             <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net cash provided (used) by operating activities.........   $ (10,081)     $ (25,683)      $ (1,589)
                                                              ---------      ---------       --------
 
CASH FLOWS FROM INVESTING ACTIVITIES:
  Cash acquired in JTS merger..............................         684             --             --
  Sale of marketable securities............................      16,460         46,698          4,467
  Purchase of property and equipment.......................     (11,125)          (364)             3
  Stock dividend received on investment....................          --             82             --
  Borrowing by JTS.........................................     (30,000)            --             --
  Decrease in other assets.................................          --            279             --
  Game software development costs..........................          --         (7,632)            --
  Sale of real estate......................................      10,000             --             --
                                                              ---------      ---------       --------
  Net cash provided (used) by investing activities.........     (13,981)        39,063          4,470
                                                              ---------      ---------       --------
 
CASH FLOWS FROM FINANCING ACTIVITIES:
  Payment on line of credit................................        (467)            --             --
  Payment on promissory note...............................      (1,965)            --             --
  Payment on capital leases................................        (215)            --             --
  Extinguishment of 5 1/4% convertible subordinated
     debentures............................................          --            (53)            --
  Issuance of common stock.................................       1,471             46              4
  Bank Borrowing...........................................       4,042             --             --
                                                              ---------      ---------       --------
  Net cash provided (used) by financing activities.........       2,866             (7)             4
                                                              ---------      ---------       --------
EFFECT OF EXCHANGE RATE CHANGES............................          --             41            (36)
                                                              ---------      ---------       --------
NET INCREASE (DECREASE) IN CASH AND EQUIVALENTS............     (21,196)        13,414          2,849
CASH AND EQUIVALENTS:
  Beginning of period......................................      31,790         22,592         28,941
                                                              ---------      ---------       --------
  End of period............................................   $  10,594      $  36,006       $ 31,790
                                                              =========      =========       ========
OTHER CASH FLOW INFORMATION FROM CONTINUING OPERATIONS:
  Interest paid............................................   $   3,102      $   2,306       $     --
NON-CASH INVESTING AND FINANCING ACTIVITIES:
  Unrealized gain on marketable securities.................   $      --      $   5,265       $     --
  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             --             --
  Extinguishment of note receivable from JTS acquisition...      30,000             --             --
</TABLE>
 
           (See Condensed Notes to Consolidated Financial Statements)
 
                                      F-17
<PAGE>   78
 
                                JTS CORPORATION
 
              CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
                                  (UNAUDITED)
 
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 Atari Corporation's 1995 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 January 29, 1996 and the current
quarter ended on October 27, 1996. The unaudited condensed consolidated
statement of operations for the nine months ended October 27, 1996 reflects the
results of Atari's operations from January 29, 1996 through October 27, 1996 and
of JTS' operations from July 30, 1996 (the merger date) through October 27,
1996. The financial statements for the transition period from January 1, 1996 to
January 28, 1996 are included also.
 
     Due to this fiscal year change, the end of the fiscal 1997 quarter does not
coincide with the end of the fiscal 1996 quarter. 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.
 
     As of October 27, 1996, JTS had a working capital deficit of $11.8 million
and net worth of $0.3 million and incurred an operating loss of $128.0 million
for the nine-month period ended October 27, 1996. In early November 1996, the
Company completed a $15 million private financing involving the sale of its
Series B Convertible Preferred Stock. JTS anticipates that with proceeds from
the sale of the preferred stock together with possible additional borrowing
arrangements and/or public offering of debt and equity securities, it will be
able to fund operations through at least the end of the next fiscal year.
 
NOTE 2.  MERGER WITH JTS CORPORATION ("JTS")
 
     Prior to the merger with JTS discussed above, Atari 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 forward was
combined with Atari's nine-month operating results. The aggregate purchase price
of $112.5 million has been allocated to the acquired assets and liabilities of
JTS. The allocation resulted in $133.5 million allocated to purchased
technology, $110 million of which represented in-process research and
development. The $110
 
                                      F-18
<PAGE>   79
 
                                JTS CORPORATION
 
      CONDENSED NOTES TO CONSOLIDATED FINANCIAL STATEMENTS -- (CONTINUED)
                                  (UNAUDITED)
 
million was expensed in the accompanying statements of operations for the nine
months ended October 27, 1996, as the technology had not yet reached
technological feasibility and does not have alternative future uses.
 
     The purchase price was preliminarily allocated as follows (in thousands):
 
<TABLE>
    <S>                                                                         <C>
    Inventory, trade accounts receivables and other current assets............   $ 24,697
    Equipment and tooling.....................................................     20,600
    In-process research and development.......................................    110,012
    Existing technology.......................................................     23,542
    Goodwill..................................................................     17,956
    Liabilities assumed.......................................................    (84,308)
                                                                                 --------
         Net assets acquired..................................................   $112,499
                                                                                 ========
</TABLE>
 
     In April 1996, the Company acquired 90% of the outstanding shares of
Moduler Electronics, a disk drive manufacturer. The Company acquired the stock
in consideration for 1,911,673 shares of the Company's Series A preferred stock
and a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The acquisition was accounted for as a
purchase.
 
     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 nine months ended October 27, 1996 and for the nine months
ended October 28, 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 acquisition
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 1996
combine Atari's, JTS' and Moduler Electronics' results for the nine months ended
October 27, 1996. The proforma results for 1995 combine Atari's results for the
nine months ended September 30, 1995 with JTS' and Moduler Electronics' nine
months ended October 28, 1995. The following unaudited proforma results include
the straight-line amortization of intangibles over periods ranging from three
years to seven years.
 
<TABLE>
<CAPTION>
                                                                       NINE MONTHS ENDED
                                                                     ---------------------
                                                                       1996        1995
                                                                     ---------   ---------
    <S>                                                              <C>         <C>
    Revenue........................................................  $  68,821   $  17,826
    Gross Margin...................................................    (15,044)    (10,232)
    Net (loss).....................................................   (167,284)    (47,035)
    Net (loss) per share...........................................  $   (1.61)  $   (0.45)
    Weighted average common shares outstanding.....................    103,658     103,642
</TABLE>
 
NOTE 3.  INVENTORIES
 
     Inventories consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                          OCTOBER 27,   JANUARY 28,   DECEMBER 31,
                                                             1996          1996           1995
                                                          -----------   -----------   ------------
    <S>                                                   <C>           <C>           <C>
    Finished goods......................................    $ 1,926       $ 5,378       $  9,927
    Raw materials and work-in-process...................     13,676           298          1,007
                                                            -------        ------        -------
         Total..........................................    $15,602       $ 5,666       $ 10,934
                                                            =======        ======        =======
</TABLE>
 
                                      F-19
<PAGE>   80
 
                         REPORT OF ARTHUR ANDERSEN LLP
 
To the Board of Directors of
  JTS Corporation:
 
     We have audited the accompanying balance sheets of JTS Corporation (a
Delaware corporation), formerly JT Storage, Inc., as of January 28, 1996 and
January 29, 1995, and the related statements of operations, stockholders'
deficit and cash flows for the year ended January 28, 1996 and the period from
inception (February 3, 1994) to January 29, 1995. 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. 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, the financial statements referred to above present fairly,
in all material respects, the financial position of JTS Corporation as of
January 28, 1996 and January 29, 1995, and the results of its operations and its
cash flows for the year ended January 28, 1996 and the period from inception
(February 3, 1994) to January 29, 1995, in conformity with generally accepted
accounting principles.
 
     The accompanying financial statements have been prepared assuming that the
Company will continue as a going concern. As discussed in Note 1 to the
financial statements, the Company has suffered recurring losses from operations
and has a net capital deficiency that raises substantial doubt about its ability
to continue as a going concern. Management's plans in regard to these matters
are also described in Note 1. The financial statements do not include any
adjustments that might result from the outcome of this uncertainty.
 
ARTHUR ANDERSEN LLP
San Jose, California
April 4, 1996
 
                                      F-20
<PAGE>   81
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                                 BALANCE SHEETS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                        JANUARY 28,     JANUARY 29,
                                                                           1996            1995
                                                                        -----------     -----------
<S>                                                                     <C>             <C>
ASSETS
CURRENT ASSETS:
  Cash and cash equivalents...........................................   $     547        $    --
  Trade accounts receivable, less allowance for doubtful accounts of
     $730 and $4, respectively........................................       1,286             13
  Receivable from Moduler Electronics.................................       6,892          1,033
  Other receivables...................................................         812             28
  Inventories.........................................................       2,093            358
  Prepaid and other current assets....................................         240            154
                                                                           -------         ------
          Total current assets........................................      11,870          1,586
                                                                           -------         ------
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, at cost:
  Machinery and equipment.............................................       9,231          2,254
  Leasehold improvements..............................................         398             --
  Furniture and fixtures..............................................       1,145             92
  Less -- Accumulated depreciation and amortization...................      (2,831)          (335)
                                                                           -------         ------
                                                                             7,943          2,011
                                                                           -------         ------
                                                                         $  19,813        $ 3,597
                                                                           =======         ======
LIABILITIES AND STOCKHOLDERS' DEFICIT
CURRENT LIABILITIES:
  Bank line of credit.................................................   $   4,323        $   743
  Note payable to stockholder.........................................       1,000             --
  Accounts payable --
     Trade............................................................       7,226          1,780
     Moduler Electronics..............................................       9,546            366
  Accrued payroll and bonus...........................................         978            249
  Other accrued liabilities...........................................       2,523            540
  Current portion of capitalized lease obligations and long-term
     debt.............................................................       1,520            146
                                                                           -------         ------
          Total current liabilities...................................      27,116          3,824
LONG-TERM LIABILITIES:
  Capitalized lease obligations and long-term debt, net of current
     portion..........................................................       3,485             61
  Convertible notes payable to related parties........................          --          1,902
  Convertible notes payable...........................................          --          3,219
                                                                           -------         ------
          Total liabilities...........................................      30,601          9,006
                                                                           -------         ------
COMMITMENTS AND CONTINGENCIES (NOTE 6)
REDEEMABLE SERIES A PREFERRED STOCK:
  $.000001 par value; 31,200 shares authorized (increased to 70,000
     shares in February 1996); 27,785 shares issued and outstanding in
     1996, liquidation value of $29,716...............................      27,785             --
                                                                           -------         ------
STOCKHOLDERS' DEFICIT:
  Common stock, $.000001 par value; 60,000 shares authorized
     (increased to 90,000 shares in February 1996); 7,367 and 4,833
     shares issued and outstanding in 1996 and 1995, respectively.....          --             --
  Additional paid-in capital..........................................       6,004             --
  Deferred compensation...............................................      (4,320)            --
  Notes receivable from stockholders..................................        (623)            --
  Accumulated deficit.................................................     (39,634)        (5,409)
                                                                           -------         ------
          Total stockholders' deficit.................................     (38,573)        (5,409)
                                                                           -------         ------
                                                                         $  19,813        $ 3,597
                                                                           =======         ======
</TABLE>
 
               The accompanying notes to financial statements are
                   an integral part of these balance sheets.
 
                                      F-21
<PAGE>   82
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                            STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                                      FOR THE PERIOD
                                                                 52 WEEKS ENDED      FROM INCEPTION TO
                                                                JANUARY 28, 1996     JANUARY 29, 1995
                                                                ----------------     -----------------
<S>                                                             <C>                  <C>
REVENUES:
  Product sales...............................................      $ 13,502              $    --
  Technology license revenue..................................         5,275                   --
                                                                    --------              -------
                                                                      18,777                   --
COST OF PRODUCT SALES.........................................        28,548                   --
                                                                    --------              -------
GROSS MARGIN (DEFICIT)........................................        (9,771)                  --
                                                                    --------              -------
OPERATING EXPENSES:
  Research and development....................................        13,375                3,740
  Selling, general and administrative.........................         5,579                1,495
  Manufacturing start-up costs................................         3,812                   --
                                                                    --------              -------
          Total operating expenses............................        22,766                5,235
                                                                    --------              -------
OPERATING LOSS................................................       (32,537)              (5,235)
OTHER INCOME (EXPENSE):
  Interest income.............................................           108                   --
  Interest expense............................................          (589)                (144)
  Other, net..................................................           (32)                 (30)
                                                                    --------              -------
NET LOSS......................................................      $(33,050)             $(5,409)
                                                                    ========              =======
NET LOSS PER COMMON SHARE.....................................      $  (7.17)             $ (1.12)
                                                                    ========              =======
SHARES USED IN COMPUTING NET LOSS PER SHARE...................         4,611                4,833
                                                                    ========              =======
</TABLE>
 
               The accompanying notes to financial statements are
                     an integral part of these statements.
 
                                      F-22
<PAGE>   83
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                      STATEMENTS OF STOCKHOLDERS' DEFICIT
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                             NOTES
                             COMMON STOCK     ADDITIONAL                   RECEIVABLE
                            ---------------    PAID-IN       DEFERRED         FROM       ACCUMULATED
                            SHARES   AMOUNT    CAPITAL     COMPENSATION   STOCKHOLDERS     DEFICIT      TOTAL
                            ------   ------   ----------   ------------   ------------   -----------   --------
<S>                         <C>      <C>      <C>          <C>            <C>            <C>           <C>
BALANCE AT INCEPTION,
  FEBRUARY 3, 1994........     --     $ --      $   --       $     --        $   --       $      --    $     --
  Issuance of common stock
     to founders at
     $.000001 per share...  4,350       --          --             --            --              --          --
  Issuance of common stock
     at $.000001 in
     exchange for
     technology license...    483       --          --             --            --              --          --
  Net loss for the
     period...............     --       --          --             --            --          (5,409)     (5,409)
                            -----      ---      ------        -------         -----        --------    --------
BALANCE, JANUARY 29,
  1995....................  4,833       --          --             --            --          (5,409)     (5,409)
  Exchange of common stock
     for Redeemable Series
     A preferred stock....   (483)      --          --             --            --          (1,000)     (1,000)
  Issuance costs of
     Redeemable Series A
     preferred stock......     --       --          --             --            --            (175)       (175)
  Shares issued under the
     stock option plan....     17       --           4             --            --              --           4
  Shares issued under
     restricted stock
     purchase
     agreements...........  3,000       --       6,000         (5,250)         (623)             --         127
  Amortization of deferred
     compensation.........     --       --          --            930            --              --         930
  Net loss................     --       --          --             --            --         (33,050)    (33,050)
                            -----      ---      ------        -------         -----        --------    --------
BALANCE, JANUARY 28,
  1996....................  7,367     $ --      $6,004       $ (4,320)       $ (623)      $ (39,634)   $(38,573)
                            =====      ===      ======        =======         =====        ========    ========
</TABLE>
 
               The accompanying notes to financial statements are
                     an integral part of these statements.
 
                                      F-23
<PAGE>   84
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                            STATEMENTS OF CASH FLOWS
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                                      FOR THE PERIOD
                                                                   52 WEEKS ENDED    FROM INCEPTION TO
                                                                  JANUARY 28, 1996   JANUARY 29, 1995
                                                                  ----------------   -----------------
<S>                                                               <C>                <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss......................................................      $(33,050)           $(5,409)
  Adjustments to reconcile net loss to net cash used in
     operating activities --
     Receivable from Moduler Electronics........................        (5,859)            (1,033)
     Payable to Moduler Electronics for finished goods
       inventory................................................         9,180                366
     Depreciation and amortization expense......................         2,496                551
     Reserve for bad debts......................................           726                  4
     Issuance of preferred stock for services rendered..........            30                 --
     Payables converted to note payable and subsequently to
       preferred stock..........................................           300              1,902
     Amortization of deferred compensation......................           930                 --
     Changes in assets and liabilities:
       Trade receivables........................................        (1,999)               (17)
       Other receivables........................................          (757)               (28)
       Inventories..............................................        (1,735)              (312)
       Prepaid and other current assets.........................           (86)              (154)
       Accounts payable.........................................         5,446              1,780
       Accrued liabilities......................................         2,712                686
                                                                      --------            -------
          Net cash used in operating activities.................       (21,666)            (1,664)
                                                                      --------            -------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchase of property and equipment............................        (3,132)            (1,984)
                                                                      --------            -------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Proceeds from bank line of credit.............................         3,580                743
  Proceeds from issuance of common stock........................           104                 --
  Proceeds from issuance of preferred stock.....................        18,556                 --
  Preferred stock issuance costs................................          (175)                --
  Payments on capital lease obligations.........................          (408)               (10)
  Payments on long-term debt....................................           (90)               (90)
  Proceeds from notes payable...................................         3,778              3,005
                                                                      --------            -------
          Net cash provided by financing activities.............        25,345              3,648
                                                                      --------            -------
NET CHANGE IN CASH AND CASH EQUIVALENTS.........................           547                 --
CASH AND CASH EQUIVALENTS AT BEGINNING OF THE PERIOD............            --                 --
                                                                      --------            -------
CASH AND CASH EQUIVALENTS AT END OF THE PERIOD..................      $    547            $    --
                                                                      ========            =======
SUPPLEMENTAL DISCLOSURE OF CASH FLOW INFORMATION
  Cash paid for interest........................................      $    449            $    --
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES:
  Sale of common stock for notes................................      $    750            $    --
  Equipment purchased under capital leases......................         5,296                 82
  Conversion of notes payable to preferred stock................         9,199                 --
  Issuance of convertible debt upon Kalok acquisition...........            --                214
  Equipment ($280) and inventory ($49) acquired net of related
     accrued liabilities of $104 from Kalok.....................            --                225
  Issuance of debt upon acquisition of Kalok....................            --                225
  Exchange of TEAC common stock to preferred stock..............         1,000                 --
</TABLE>
 
               The accompanying notes to financial statements are
                     an integral part of these statements.
 
                                      F-24
<PAGE>   85
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                         NOTES TO FINANCIAL STATEMENTS
 
1.  ORGANIZATION AND OPERATIONS:
 
     JTS Corporation (the "Company"), a Delaware corporation, formerly JT
Storage, Inc. (Note 12), was incorporated on February 3, 1994 to develop, market
and manufacture hard disk drives. The Company was a development stage company
prior to the commencement of production shipments in October 1995. Accordingly,
the Company ceased to be in the development stage at that time. Moduler
Electronics (India) Private Limited ("Moduler Electronics"), a company owned by
the family of a major stockholder manufactured, on a contract basis, all of the
Company's products. In April 1996, the Company acquired 90% of Moduler
Electronics (Note 10).
 
     On February 4, 1994, as part of a settlement in United States Bankruptcy
Court, the Company acquired certain assets and assumed certain liabilities of
Kalok Corporation ("Kalok") in exchange for a note payable to the Kalok
Bankruptcy estate (Note 5) and a warrant to Kalok's unsecured creditors (Note
7). Liabilities assumed of $543,172 exceeded the fair market value of assets
acquired by approximately $215,000 which, due to uncertainties regarding its
realization, was expensed in the accompanying 1995 statement of operations. In
connection with the settlement agreement, the Company acquired certain
proprietary disk drive technology from TEAC Corporation ("TEAC") in exchange for
482,850 shares of common stock, which represented 10% of the outstanding Common
Stock of the Company. No value was assigned to the acquired technology as it had
no cost basis to TEAC and the common stock was deemed to have nominal value. On
February 3, 1995, the Company agreed to issue 1,000,000 shares of Redeemable
Series A preferred stock to TEAC in exchange for the return of the 482,850
shares of common stock and the cancellation of a shareholder agreement with TEAC
(Note 8).
 
     The Company has continued to develop its technology and manufacturing
capabilities during fiscal 1996. This development has resulted in substantial
increases in accounts receivable, accounts payable, bank borrowings, and a net
working capital deficit of $15,246,000 as of January 28, 1996. Operations
subsequent to year end indicate the Company has continued to suffer losses and
its working capital deficit has continued to increase. These factors raise a
substantial doubt about the ability of the Company to continue as a going
concern. The Company's management is pursuing plans to merge with Atari
Corporation ("Atari"). In the opinion of management, the merger, if successful,
would raise cash adequate to fund operations for at least the next 12 months.
Thereafter, the Company will require additional funding. Subsequent to year end,
Atari extended a $25 million loan to the Company of which $19.7 million had been
used as of April 4, 1996. In the event the merger (Note 10) is not consummated,
the loan will, at Atari's option, either be due September 30, 1996 or converted
into the Company's preferred stock. In addition, Moduler Electronics received
approval of additional financing from another Indian bank resulting in total
unused credit facilities of approximately $12 million, subject to certain
conditions.
 
2.  ACCOUNTING POLICIES:
 
     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.
 
     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.
 
                                      F-25
<PAGE>   86
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Inventories
 
     Inventories include direct materials at third party component manufacturers
(other than Moduler Electronics) and are recorded at the lower of cost
(first-in, first-out) or market and consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 1996    1995
                                                                ------   ----
                <S>                                             <C>      <C>
                Raw materials.................................  $2,093   $309
                Finished goods................................      --     49
                                                                         -----
                                                                           --
                                                                -------
                                                                $2,093   $358
                                                                =======  =======
</TABLE>
 
     Equipment and Leasehold Improvements
 
     Property and equipment are stated at cost and are depreciated using the
straight-line method over estimated useful lives of three years. Repairs and
maintenance costs are expensed as incurred. Major renewals and betterments which
substantially extend the useful life of the asset are capitalized.
 
     The Company had equipment with an historical cost of approximately
$4,400,000 and $530,000 located at Moduler Electronics at January 28, 1996 and
January 29, 1995, respectively.
 
     Research and Development
 
     Research and development costs are expensed as incurred and consist
primarily of salaries, materials and supplies.
 
     Income Taxes
 
     The Company follows Statement of Financial Accounting Standards No. 109,
"Accounting for Income Taxes" ("SFAS No. 109"). SFAS No. 109 requires
recognition of deferred tax assets for the expected future effects of all
deductible temporary differences, loss carryforwards and tax credit
carryforwards. Deferred tax assets are then reduced, if deemed necessary, by a
valuation allowance for the amount of any tax benefits which, more likely than
not based on current circumstances, are not expected to be realized.
 
     Cash and Cash Equivalents
 
     For purposes of the statements of cash flows, the Company considers all
highly liquid debt instruments purchased with maturities of less than three
months to be cash equivalents.
 
     Fiscal year
 
     The fiscal year of the Company is a 52- or 53-week period ending on the
Sunday closest to January 31. The fiscal year for the year ended January 28,
1996 was a 52-week period.
 
     Reclassifications
 
     Certain reclassifications have been made to prior period financial
statements to conform to the current presentation.
 
     Income from Technology License
 
     In February 1995, the Company entered into a technology transfer and
perpetual license agreement. Under this agreement, the Company granted
non-exclusive, perpetual rights to manufacture and sell certain of its products.
In connection with the agreement, the Company was obligated to achieve certain
milestones
 
                                      F-26
<PAGE>   87
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
regarding the successful completion of engineering tests, the delivery of
working models and the commencement of volume production. As of January 28, 1995
the Company had delivered a working prototype and accordingly, recognized income
of $5,275,000 in connection with achieving specified milestones in fiscal 1996.
The remaining income of $1,125,000 will be recognized as future milestones are
achieved. Funds received under this agreement are not reimbursable to the
licensee.
 
     Net Loss Per Common Share
 
     Net loss per common share is based on the weighted average number of shares
of common stock outstanding during the periods. The outstanding shares and
earnings per share have been restated for all periods presented to reflect the
impact of the stock split described in Note 7.
 
3.  INCOME TAXES:
 
     The significant components of the Company's deferred tax assets and
liabilities are as follows (in thousands):
 
<TABLE>
<CAPTION>
                                                                      1996      1995
                                                                    --------   -------
        <S>                                                         <C>        <C>
        Deferred tax assets:
          Accounts receivable reserves............................  $    292   $    --
          Inventory reserves......................................     1,731        --
          Items not currently deductible principally manufacturing
             start-up costs related to Moduler Electronics........     2,327       181
          Net operating loss carryforwards........................     9,930     1,819
          Tax credit carryforwards................................       600       135
                                                                    ---------  --------
        Total deferred tax assets.................................    14,880     2,135
        Valuation allowance.......................................   (14,828)   (2,135)
                                                                    ---------  --------
        Deferred tax assets, net of valuation allowance...........        52        --
        Deferred tax liabilities -- accelerated depreciation......       (52)       --
                                                                    ---------  --------
        Net deferred tax assets...................................  $     --   $    --
                                                                    =========  ========
</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 reporting purposes, the Company has Federal and State net
operating loss carryforwards of approximately $27,000,000 and $13,500,000,
respectively, and Federal and State research and development tax credit
carryforwards of approximately $350,000 and $250,000, respectively, all of which
will expire on various dates through 2011.
 
     The Internal Revenue Code contains provisions which may limit the amount of
tax carryforwards available to be used in any given year upon the occurrence of
certain events, including changes in ownership interests.
 
                                      F-27
<PAGE>   88
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
4.  RELATED PARTY TRANSACTIONS:
 
     Moduler Electronics Transactions
 
     As discussed in Note 1, the Company uses Moduler Electronics to manufacture
all of the Company's products. The Company purchased finished goods from Moduler
Electronics amounting to approximately $14 million in fiscal 1996 and the
majority of the accounts payable balance to Moduler Electronics at January 28,
1996 is a result of these purchases.
 
     The Company made cash advances totalling approximately $2.5 million and
also sold fixed assets and inventory totalling approximately $8.3 million to
Moduler Electronics in fiscal 1996.
 
     The advances were made to fund the manufacturing start-up of disk drives
for the Company. Because the Company intended to (and subsequently did) acquire
90% of Moduler Electronics (Note 10) and the ultimate realizability of these
advances is subject to the achievement by Moduler Electronics of successful
operations, the Company has expensed 90% of Moduler's Electronics' fiscal 1996
net loss in order to reflect its investment in Moduler Electronics' start-up
operations.
 
     The Company entered into an agreement with Moduler Electronics whereby the
Company has undertaken to bear all inventory loss and the cost of any future
warranty claims, product return and rework charges. In fiscal 1996, the Company
assumed approximately $3,448,000 and $171,000 of inventory reserve and warranty
costs, respectively.
 
     Notes Receivable From Stockholders
 
     In January 1996, the Company loaned certain executive officers $750,000
which was used by the officers to purchase 3,000,000 shares of common stock
under restricted stock purchase agreements. The notes bear interest at an annual
rate of 5.91% and the principal and interest is payable in four annual
installments. The notes are with full recourse and are collateralized by the
stock purchased. As of February 28, 1996, $127,500 had been collected on these
notes. The remaining balance of $622,500 is included in stockholders' deficit in
the 1996 accompanying balance sheet.
 
     Note Payable to Stockholders
 
     In January and February 1996, the Company entered into unsecured loan
agreements totalling $1,965,000 with certain stockholders. The notes bear
interest at 10% per annum and the principal and interest are due on July 15,
1996.
 
     Convertible Notes Payable
 
     As of January 29, 1995, the Company had $5,121,186 outstanding under
certain convertible notes payable. These notes were converted into 5,121,186
shares of redeemable preferred stock in February 1995. The Company also had
$2,764,953 outstanding under certain convertible notes payable in June 1995
which were converted into 2,764,953 shares of redeemable preferred stock in
August 1995.
 
5.  NOTES PAYABLE:
 
     Bank Line of Credit
 
     In December 1995, the Company established a line of credit for $5 million.
As of April 4, 1996, $4,323,000 was outstanding under the line. The line of
credit is collateralized by certain assets, bears interest at 9.5%, is due
monthly and the principal is due on June 30, 1996. The line of credit contains
certain financial covenants, among others, relating to minimum financial ratios
and minimum tangible net worth. The Company was not in compliance with these
covenants at January 28, 1996. The bank has waived compliance
 
                                      F-28
<PAGE>   89
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
with these covenants until such time as the merger with Atari occurs (Note 10);
however, the Company may not draw further on the line.
 
     Capitalized Lease Obligations and Long-Term Debt
 
     In conjunction with the purchase of certain assets of Kalok (see Note 1),
the Company issued a non-interest bearing note payable to the Kalok bankruptcy
estate for $225,000. The note is payable in 10 equal quarterly installments of
$22,500, with the final payment due July 1, 1996.
 
     In fiscal 1995, the Company entered into equipment lease agreements under
which it can lease up to $6.5 million of equipment through July 1996. Payments
are due in equal monthly installments over a 36 to 48 month period. As of
January 28, 1996, the cost of the leased assets was $5,377,588 and the related
accumulated depreciation was $1,087,644. The leases bear interest between 11.5%
and 18.2%.
 
     The following is a schedule of future payments under the note payable to
Kalok and equipment leases together with the present value of the net minimum
lease payments at January 28, 1996:
 
<TABLE>
<CAPTION>
                                 YEARS ENDING
                -----------------------------------------------      AMOUNT
                                                                 --------------
                                                                 (IN THOUSANDS)
                <S>                                              <C>
                1997...........................................     $  2,077
                1998...........................................        2,021
                1999...........................................        2,198
                2000...........................................          285
                                                                    --------
                Total net minimum lease payments...............        6,581
                Less -- Amount representing interest...........       (1,576)
                                                                    --------
                Present value of net minimum lease payment.....        5,005
                Less -- Current portion........................       (1,520)
                                                                    --------
                Long term portion..............................     $  3,485
                                                                    ========
</TABLE>
 
6.  COMMITMENTS AND CONTINGENCIES:
 
     Lease Commitments
 
     The Company leases its facilities and certain equipment under
non-cancelable operating leases. The future payments under these leases at
January 28, 1996 are as follows:
 
<TABLE>
<CAPTION>
                                 YEARS ENDING
                -----------------------------------------------      AMOUNT
                                                                 --------------
                                                                 (IN THOUSANDS)
                <S>                                              <C>
                1997...........................................      $  583
                1998...........................................         578
                1999...........................................         553
                2000...........................................         571
                2001...........................................         243
                                                                     ------
                                                                     $2,528
                                                                     ======
</TABLE>
 
     Total rent expense for the periods ended January 29, 1995 and January 28,
1996 was approximately $180,000 and $425,000, respectively.
 
     Royalty Obligation
 
     As discussed in note 1 the Company licenses certain technology from TEAC.
In the event the Company commences selling certain products incorporating
certain TEAC Technology it will incur a royalty obligation of up to 2% of sales
for a certain period. The Company was not marketing any products incorporating
TEAC developed technology and accordingly, no royalties were due as of January
28, 1996.
 
                                      F-29
<PAGE>   90
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  COMMON STOCK:
 
     Stock Split and Capitalization
 
     In February 1995, the Board of Directors approved a 4,350-for-1 common
stock split. All share and per share amounts in the accompanying financial
statements have been restated to reflect this split. In February 1996 the
Company amended its certificate of incorporation and authorized 90,000,000 and
70,000,000 shares of common and Redeemable Series A Preferred Stock,
respectively.
 
     Warrants
 
     The Company has issued warrants to purchase 100,000 shares of common stock
to the unsecured creditors of Kalok Corporation in conjunction with the
Company's acquisition of Kalok's assets. The warrants may be exercised for a
one-year period commencing on the earlier of the closing of an initial public
offering or the public registration of the Company's stock. The exercise price
of the warrant is 25% of the initial public offering price or the fair market
value of the Company's stock if the Company becomes a public registrant absent
an initial public offering. Such warrants were deemed to have nominal value at
the issuance date and, accordingly, are carried at no value in the accompanying
financial statements.
 
     The Company has also issued warrants to purchase 500,000 shares of common
stock at $1.00 and $3.00 to the equipment lease company and the bank with which
it has a line of credit, respectively. The warrants may be exercised at any time
before various dates through 2001. In the event of any acquisition, the warrant
to purchase 450,000 shares issued to the equipment lease company will terminate.
 
     Restricted Stock Purchase Agreement
 
     The Company issued 3,000,000 shares of its common stock to certain officers
in exchange for a $750,000 note receivable (Note 4). The Company has the right
to repurchase such shares at the original purchase price. However, the Company's
right to repurchase 1/48 of such shares lapses monthly. As of January 28, 1996,
2,469,271 shares were subject to repurchase. Upon issuance of the common stock
the Company recorded deferred compensation of $5,250,000 for the difference
between the per share sales price of $.25 and $2.00 (the per share fair market
value at the date of grant for financial reporting purposes). The Company is
recognizing the deferred compensation ratably over the period that the
repurchase agreement lapses. 2,000,000 of such shares, however, will no longer
be subject to repurchase in the event there are certain changes of control of
the Company. The merger (Note 10) constitutes a change of control and
accordingly, any remaining unamortized deferred compensation will be expensed at
that time.
 
     Stock Option Plan
 
     The Company has reserved 4,300,000 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 at any time, and
expire no later than ten years from the date of grant. Options granted vest at a
rate of 25% per annum.
 
     The following table presents the option activity under the Option Plan for
the period from inception to January 28,1996.
 
                                      F-30
<PAGE>   91
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
<TABLE>
<CAPTION>
                                                                                 OPTION
                                                                  NUMBER OF       PRICE
                                                                   OPTIONS      PER SHARE
                                                                  ---------     ---------
    <S>                                                           <C>           <C>
    Options outstanding at January 29, 1995.....................        --           --
    Granted.....................................................  3,996,675       $ .25
    Exercised...................................................   (16,729)       $ .25
    Forfeited...................................................  (219,199)       $ .25
                                                                  ---------        ----
    Options outstanding at January 28, 1996.....................  3,760,747       $ .25
                                                                  ---------        ----
    Exercisable at January 28, 1996.............................   627,193        $ .25
                                                                  =========        ====
</TABLE>
 
     In February and March 1996, the Company issued options to purchase 486,000
shares of common stock to various employees. Such options are ratably
exercisable ranging from $.25 to $2.95 per share and vest ratably over a four
year period.
 
     In March 1996, two officers purchased 1,000,000 shares of the Company's
Common Stock each at a purchase price of $1.00 per share. All of such shares are
subject to a right of repurchase which lapses after five years of service with
the Company provided, however, that the right of repurchase will lapse at the
rate of one-eighth in September 1996 and 1/48(th) per month thereafter if the
merger with Atari closes (Note 10).
 
     Common Stock Reserved for Future Issuance
 
     As of January 28, 1996, the Company has reserved the following shares of
common stock for issuance in connection with:
 
<TABLE>
            <S>                                                        <C>
            Conversion of redeemable preferred stock.................  27,785,370
            Conversion of redeemable preferred stock expected to be
              issued in connection with the Moduler Electronics
              acquisition............................................   1,911,000
            Stock option plan........................................   4,283,271
            Warrants to purchase common stock........................     600,000
                                                                       ----------
                                                                       34,579,641
                                                                       ==========
</TABLE>
 
8.  REDEEMABLE SERIES A CONVERTIBLE PREFERRED STOCK:
 
     In fiscal 1996, the Company issued 27.8 million shares of Series A
preferred stock at $1.00 per share for cash and conversion of certain notes
payable. The Company also issued 30,000 shares of Series A preferred stock to a
consultant for services. The Company also issued 1,000,000 shares of preferred
stock to TEAC in exchange for 482,850 shares of the Company's common stock and
the termination of the TEAC stockholder agreement. The exchange with TEAC was
accounted for as an equity transaction and the value of the preferred stock
issued was charged to accumulated deficit in the accompanying 1996 statement of
operations.
 
     The rights, restrictions and preferences of the preferred stock are as
follows:
 
     - Annual dividends of $.09 per share per annum, when and if declared by the
       Board of Directors. Dividends are cumulative and are payable, at the
       option of the Company, in cash or shares of common stock.
 
     - In the event of any liquidation, dissolution or winding up of the
       Company, the holders of preferred stock shall be entitled to receive
       proceeds equal to $1.00 per share plus the greater of (i) all cumulative
       unpaid dividends or (ii) any declared and unpaid dividends for preferred
       stock then held by them. This distribution will occur prior to any
       distribution to the common shareholders. At January 28, 1996, the
       liquidation preference was $29,715,761.
 
                                      F-31
<PAGE>   92
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     - Upon the election of the holders of a majority of the outstanding shares
       of preferred stock, 33%, 33% and 34% of the stock will be redeemed in
       cash by the Company on February 4, 2000, February 4, 2001, and February
       4, 2002, respectively. The redemption price shall be equal to $1.00 plus
       all accrued but unpaid dividends.
 
     - The following table represents the redemption amounts required under the
       agreement:
 
<TABLE>
<CAPTION>
                                    YEAR
                ---------------------------------------------      AMOUNT
                                                               --------------
                                                               (IN THOUSANDS)
                <S>                                            <C>
                2000.........................................     $  9,905
                2001.........................................        9,905
                2002.........................................        9,906
                                                                   -------
                                                                  $ 29,716
                                                                   =======
</TABLE>
 
     - At the option of the holder, each preferred share is convertible into one
       share of common stock. The conversion rate is subject to change upon the
       occurrence of certain events. The preferred stockholders have agreed to
       convert each share of preferred stock into one share of common stock
       prior to the closing of the merger with Atari (Note 10).
 
     - The preferred stock converts automatically into common stock at the
       earlier of (i) the closing of an underwritten public offering of the
       Company's common stock at a price of not less than $5.00 per share and an
       aggregate offering price of greater than $10,000,000, or (ii) upon the
       affirmative election of the holders of at least 66.7% of the then
       outstanding preferred stock.
 
     - The holders of preferred stock are entitled to one vote for each share of
       common stock into which such share may be converted.
 
9.  EXPORT SALES AND SIGNIFICANT CUSTOMERS:
 
     The Company operates in a single industry segment. The Company markets its
products in the United States and in foreign countries through its sales
personnel, independent sales representatives and original equipment
manufacturers. The Company's geographic sales as a percent of 1996 net revenues
are as follows:
 
<TABLE>
                <S>                                                      <C>
                United States..........................................   19%
                Europe.................................................   81%
                                                                         ---
                                                                         100%
                                                                         ===
</TABLE>
 
     Sales to major customers as a percentage of 1996 product sales are as
follows:
 
<TABLE>
                <S>                                                       <C>
                Olidata.................................................   34%
                Connexe.................................................   12%
                Liuski..................................................   11%
                Aashima.................................................   10%
</TABLE>
 
10.  PROPOSED MERGER AND ACQUISITION:
 
     Atari Corporation
 
     On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. The merger requires
shareholder approval and is expected to be consummated in the second quarter of
calendar year 1996. In connection with the merger, Atari extended a bridge loan
to the Company in the amount of $25.0 million maturing on September 30, 1996
with a stated interest rate of 8 1/2% per annum. If the merger is not
consummated, the bridge loan is convertible at the option of Atari or the
 
                                      F-32
<PAGE>   93
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 10)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
Company into shares of the Company's Series A preferred stock and warrants to
acquire the Company's Series A preferred stock, subject to certain conditions.
 
     Moduler Electronics
 
     In March 1995, the Company agreed to acquire the hard disk drive division
of Moduler Electronics for 1,911,673 shares of the Company's Series A preferred
stock and a warrant to purchase 500,000 shares of the Company's common stock at
an exercise price of $.25 per share. The Company subsequently assumed
operational and management control of certain portions of the hard disk drive
business of Moduler Electronics. The verbal agreement contemplated that prior to
the Company's acquisition, Moduler Electronics would divest itself of certain
voice coil assembly and other operations not directly involved in its hard disk
drive business.
 
     In April 1996, following Moduler Electronics' divestiture of its voice coil
business and businesses unrelated to its hard disk drive operations, the Company
acquired 90% of the outstanding capital stock of Moduler Electronics. Upon the
closing of the transaction, the Company acquired the stock in consideration for
1,911,673 shares of the Company's Series A preferred stock and a warrant to
purchase 750,000 shares of the Company's common stock at an exercise price of
$0.25 per share. The warrant is immediately exercisable as to 500,000 shares of
the Company's common stock and becomes exercisable with respect to the remaining
250,000 shares when there becomes available to Moduler Electronics certain
borrowings and credit facilities in the amount of $29,000,000. Subject to the
foregoing, the warrant may be exercised at any time until February 25, 2001.
 
11.  RETIREMENT SAVING PLAN
 
     In January 1996, the Company adopted the Employee 401(K) Saving Plan ("the
plan"). The plan covers substantially all of employees and allows participants
to defer a portion of their annual compensation on a pre-tax basis. The plan
permits, but does not require, additional matching contributions and profit
sharing contributions to the plan by the Company on behalf of all participants.
In fiscal 1996, the Company did not make any such contributions.
 
12.  EVENTS SUBSEQUENT TO DATE OF AUDITORS' REPORT (UNAUDITED):
 
     Change in Name
 
     On June 18, 1996, the Company changed its name to JTS Corporation from JT
Storage, Inc.
 
     Litigation
 
     The Company has been served with a complaint filed in the Superior Court of
the State of California in and for the County of Santa Clara by Venture Lending
& Leasing, Inc. ("VLLI") relating to the relocation of certain leased equipment
from its initial location to Madras, India, in alleged violation of the lease
agreement. The complaint alleges fraud, possession and breach of the lease
agreement and seeks damages of approximately $4.6 million. Such amount includes
the lease liability of $3.4 million which is recorded in the accompanying
balance sheet. The Company is currently evaluating its alternatives and the
parties have commenced preliminary settlement discussions.
 
                                      F-33
<PAGE>   94
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
 
                     CONDENSED CONSOLIDATED BALANCE SHEETS
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                                      JANUARY 28,
                                                                                         1996
                                                                        JULY 28,      -----------
                                                                          1996
                                                                        ---------
                                                                        (UNAUDITED)
<S>                                                                     <C>           <C>
                                             ASSETS
CURRENT ASSETS:
Cash, cash equivalent and restricted cash.............................  $     684      $     547
Trade accounts receivable, less allowance for doubtful accounts of
  $1,011 and $730, respectively.......................................      9,660          1,286
Receivable from Moduler Electronics...................................         --          6,892
Other receivables.....................................................        681            812
Inventories...........................................................     12,761          2,093
Prepaid and other current assets......................................        911            240
                                                                           ------         ------
                                                                           24,697         11,870
EQUIPMENT AND LEASEHOLD IMPROVEMENTS, net.............................     16,830          7,943
GOODWILL..............................................................        168             --
                                                                           ------         ------
          TOTAL.......................................................  $  41,695      $  19,813
                                                                           ======         ======
                              LIABILITIES AND SHAREHOLDERS' DEFICIT
CURRENT LIABILITIES:
Bank line of credit...................................................  $  10,400      $   4,323
Notes payable to stockholders.........................................      1,965          1,000
Note payable to Atari Corporation.....................................     30,000             --
Accounts payable --
  Trade...............................................................     23,385          7,226
  Moduler Electronics.................................................         --          9,546
Accrued liabilities...................................................      8,409          3,501
Current portion of capitalized lease obligation and long-term debt....      1,723          1,520
                                                                           ------         ------
                                                                           75,882         27,116
                                                                           ------         ------
LONG-TERM OBLIGATIONS.................................................      8,426          3,485
                                                                           ------         ------
REDEEMABLE SERIES A PREFERRED STOCK:
$.000001 par value -- authorized 70,000 shares; outstanding: 29,697
  and 27,785 shares, respectively.....................................     29,697         27,785
                                                                           ------         ------
STOCKHOLDERS' DEFICIT:
Common stock, $.000001 par value -- authorized 90,000 shares;
  outstanding: 9,447 and 7,367 shares, respectively...................         --             --
Additional paid-in capital............................................      8,059          6,004
Deferred compensation.................................................     (3,420)        (4,320)
Notes receivable from stockholders....................................     (2,510)          (623)
Accumulated deficit...................................................    (74,439)       (39,634)
                                                                           ------         ------
                                                                          (72,310)       (38,573)
                                                                           ------         ------
          TOTAL.......................................................  $  41,695      $  19,813
                                                                           ======         ======
</TABLE>
 
                            See accompanying notes.
 
                                      F-34
<PAGE>   95
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
 
          CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS (UNAUDITED)
                    (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                    ---------------------------------
                                                                    JULY 28, 1996      JULY 30, 1995
                                                                    --------------     --------------
<S>                                                                 <C>                <C>
REVENUE:
  Product sales...................................................     $ 33,764           $     48
  Technology license revenue......................................           --              3,829
                                                                    --------------     --------------
                                                                         33,764              3,877
                                                                    --------------     --------------
COST AND EXPENSES:
  Cost of sales...................................................       45,249              3,498
  Research and development........................................       14,091              3,887
  Selling, general and administrative.............................        7,746              1,557
                                                                    --------------     --------------
                                                                         67,086              8,942
                                                                    --------------     --------------
OPERATING LOSS                                                          (33,322)            (5,065)
Interest income...................................................          153                 --
Interest expense..................................................       (1,790)                --
Other income (expense)............................................          155                  5
                                                                    --------------     --------------
NET LOSS                                                               $(34,804)          $ (5,060)
                                                                     ==========         ==========
NET LOSS PER COMMON SHARE.........................................     $  (3.69)          $  (1.16)
                                                                     ==========         ==========
SHARES USED IN COMPUTING NET LOSS PER SHARE.......................        9,434              4,360
                                                                     ==========         ==========
 
                                       See accompanying notes.
</TABLE>
 
                                      F-35
<PAGE>   96
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
 
          CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS (UNAUDITED)
                                 (IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                            SIX MONTHS ENDED
                                                                     -------------------------------
                                                                     JULY 28, 1996     JULY 30, 1995
                                                                     -------------     -------------
<S>                                                                  <C>               <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net cash used in operations........................................    $ (32,356)        $  (7,045)
                                                                        --------          --------
CASH FLOWS FROM INVESTING ACTIVITIES:
Property purchases.................................................       (2,501)           (3,056)
Cash acquired from the Moduler acquisition.........................        1,634                --
                                                                        --------          --------
Net cash used in investing activities..............................         (867)           (3,056)
CASH FLOWS FROM FINANCING ACTIVITIES:
Proceeds from issuance of preferred stock..........................           --             8,855
Proceeds from note payable -- Atari Corporation....................       30,000                --
Other..............................................................        3,360             1,848
                                                                        --------          --------
Net cash provided by financing activities..........................       33,360            10,703
NET INCREASE IN CASH AND EQUIVALENTS...............................          137               602
CASH AND EQUIVALENTS:
Beginning of period................................................          547                --
                                                                        --------          --------
End of period......................................................    $     684         $     602
                                                                        ========          ========
SUPPLEMENTAL SCHEDULE OF NON-CASH INVESTING AND FINANCING
  ACTIVITIES:
Issuance of preferred stock in connection with the Moduler
  acquisition......................................................    $   1,912         $      --
Assets of $17,296 acquired net of related liabilities of $15,449
  assumed from Moduler.............................................        1,847                --
                                                                        ========          ========
</TABLE>
 
                            See accompanying notes.
 
                                      F-36
<PAGE>   97
 
                  JTS CORPORATION (PRIOR TO MERGER -- NOTE 4)
 
              NOTES TO CONDENSED 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, in the opinion of management, the accompanying
financial statements include all adjustments (consisting of only normal
recurring adjustments) necessary to present fairly the financial information set
forth therein, in accordance with generally accepted accounting principles. The
condensed financial statements should be read in conjunction with the financial
statements and notes thereto for the full year included elsewhere in this
document.
 
     The Company operates with a 52/53 week fiscal calendar. Both quarters
covered by this report have 13 weeks for simplicity of presentation.
 
NOTE 2.  ACQUISITION OF MODULER ELECTRONICS
 
     In April 1996, the Company acquired 90% of the outstanding shares of
Moduler Electronics, a disk drive manufacturer. The Company acquired the stock
in consideration for 1,911,673 shares of the Company's Series A preferred stock
and a warrant to purchase 750,000 shares of the Company's common stock at an
exercise price of $0.25 per share. The acquisition was accounted for as a
purchase.
 
     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 table below reflects condensed pro forma operating results of the
combined companies for the six months then ended as if the acquisition took
place at the beginning of each period.
 
<TABLE>
<CAPTION>
                                                                 JULY 28,     JULY 30,
                                                                   1996         1995
                                                                 --------     --------
        <S>                                                      <C>          <C>
        Revenues...............................................  $ 33,764     $  5,532
        Net loss...............................................  $(34,923)    $(12,392)
</TABLE>
 
NOTE 3.  INVENTORIES
 
     Inventories consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                 JULY 28,     JANUARY 28,
                                                                   1996          1996
                                                                 --------     -----------
        <S>                                                      <C>          <C>
        Raw materials..........................................  $  8,163       $ 2,093
        Work in process........................................     2,614            --
        Finished goods.........................................     1,984            --
                                                                  -------        ------
                                                                 $ 12,761       $ 2,093
                                                                  =======        ======
</TABLE>
 
NOTE 4.  MERGER WITH ATARI CORPORATION
 
     On February 12, 1996, the Company entered into a merger agreement with
Atari providing for the merger of the Company and Atari. On April 8, 1996, the
merger agreement was amended and restated. The merger was consummated on July
30, 1996. There was no significant transaction from July 28, 1996 through the
merger date and therefore, the balance sheet as of July 28, 1996 also reflects
the financial position of the Company as of the merger date.
 
                                      F-37
<PAGE>   98
 
                         REPORT OF ARTHUR ANDERSEN LLP
 
To Moduler Electronics (India) Private Limited:
 
     We have audited the accompanying statements of assets and liabilities of
The Hard Disk Drive Division of Moduler Electronics (India) Private Limited as
of January 28, 1996 and January 31, 1995, and the related statements of revenues
and expenses and cash flows for the year ended January 28, 1996. These financial
statements are the responsibility of the Division'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. 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.
 
     The financial statements referred to above have been prepared for the
purpose of complying with the rules and regulations of the Securities and
Exchange Commission (for inclusion in the joint proxy statement of Atari
Corporation and JTS Corporation, formerly JT Storage, Inc.) as described in Note
1, and are not intended to be a complete presentation of the assets,
liabilities, revenues, expenses and cash flows of Moduler Electronics (India)
Private Limited.
 
     In our opinion, the financial statements referred to above present fairly,
in all material respects, the assets and liabilities of The Hard Disk Drive
Division of Moduler Electronics (India) Private Limited as of January 28, 1996
and January 31, 1995, and the related revenues, expenses and cash flows for the
year ended January 28, 1996 in conformity with generally accepted accounting
principles in the United States of America.
 
     The accompanying financial statements have been prepared assuming that the
Division will continue as a going concern. As discussed in Note 1 to the
financial statements, the Division has suffered a loss from operations and has
an excess of liabilities over assets that raises substantial doubt about its
ability to continue as a going concern. Management's plans in regard to these
matters are also described in Note 1. The financial statements do not include
any adjustments that might result from the outcome of this uncertainty.
 
ARTHUR ANDERSEN LLP
 
San Jose, California
April 4, 1996
 
                                      F-38
<PAGE>   99
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
 
                      STATEMENTS OF ASSETS AND LIABILITIES
                 (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
 
<TABLE>
<CAPTION>
                                                                        JANUARY 28,     JANUARY 31,
                                                                           1996            1995
                                                                        -----------     -----------
<S>                                                                     <C>             <C>
                                              ASSETS
CURRENT ASSETS:
  Cash and cash equivalents...........................................    $   488         $    65
  Restricted cash balances............................................        380             197
  Due from other business units, net..................................         --             776
  Advances to suppliers...............................................        249              12
  Inventories.........................................................      5,983           1,296
  Prepaid expenses and other current assets...........................        264              61
                                                                          -------          ------
          Total current assets........................................      7,364           2,407
PLANT AND EQUIPMENT, at cost, net of accumulated depreciation.........      5,603           1,645
                                                                          -------          ------
          Total assets................................................    $12,967         $ 4,052
                                                                          -------          ------
 
                                            LIABILITIES
CURRENT LIABILITIES:
  Secured short term borrowings.......................................    $ 6,085         $   367
  Current portion of long term loans and capital lease obligations....        105              67
  Due to related parties, net.........................................      1,168           1,261
  Accounts payable....................................................      6,268           1,494
  Accrued liabilities.................................................        197              46
                                                                          -------          ------
          Total current liabilities...................................     13,823           3,235
CAPITAL LEASE OBLIGATIONS, net of current portion.....................         21              --
SECURED LONG TERM LOANS, net of current portion.......................      2,742             200
                                                                          -------          ------
          Total liabilities...........................................     16,586           3,435
                                                                          -------          ------
NET (LIABILITIES) ASSETS..............................................    $(3,619)        $   617
                                                                          =======          ======
</TABLE>
 
               The accompanying notes to financial statements are
                     an integral part of these statements.
 
                                      F-39
<PAGE>   100
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
 
                       STATEMENT OF REVENUES AND EXPENSES
            FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
                 (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
 
<TABLE>
<S>                                                                                 <C>
NET REVENUES......................................................................  $ 15,580
COST OF GOODS SOLD................................................................   (19,160)
                                                                                    --------
     Gross margin (deficit).......................................................    (3,580)
OTHER INCOME/(EXPENSE):
  Interest and other income.......................................................       141
  Foreign currency loss...........................................................      (333)
  Interest expense................................................................      (464)
                                                                                    --------
  Net loss........................................................................  $ (4,236)
                                                                                    ========
</TABLE>
 
               The accompanying notes to financial statements are
                      an integral part of this statement.
 
                                      F-40
<PAGE>   101
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
 
                            STATEMENT OF CASH FLOWS
 
            FOR THE PERIOD FROM FEBRUARY 1, 1995 TO JANUARY 28, 1996
                 (CURRENCY: UNITED STATES DOLLAR, IN THOUSANDS)
 
<TABLE>
<S>                                                                                  <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
  Net loss.........................................................................  $(4,236)
  Adjustments to reconcile net loss to net cash used in operating activities --
     Depreciation expense..........................................................      667
     Write-off of plant and equipment..............................................      558
     Decrease/(increase) in current assets --
       Due from other business units, net..........................................      776
       Advances to suppliers.......................................................     (237)
       Inventories.................................................................   (4,687)
       Prepaid expenses and other current assets...................................     (203)
     Increase (decrease) in current liabilities --
       Due to related parties, net.................................................      (93)
       Accounts payable............................................................    4,774
       Accrued liabilities.........................................................      151
                                                                                     --------
          Net cash used in operating activities....................................   (2,530)
                                                                                     --------
CASH FLOWS FROM INVESTING ACTIVITIES:
  Purchases of plant and equipment.................................................   (2,491)
                                                                                     --------
CASH FLOWS FROM FINANCING ACTIVITIES:
  Net secured short term borrowings................................................    5,718
  Principal payments under secured long term loan..................................      (91)
                                                                                     --------
          Net cash provided by financing activities................................    5,627
                                                                                     --------
NET INCREASE IN CASH, CASH EQUIVALENTS AND RESTRICTED CASH.........................      606
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, beginning of period....................      262
                                                                                     --------
CASH, CASH EQUIVALENTS AND RESTRICTED CASH, end of period..........................  $   868
                                                                                     ========
</TABLE>
 
               The accompanying notes to financial statements are
                      an integral part of this statement.
 
                                      F-41
<PAGE>   102
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                         NOTES TO FINANCIAL STATEMENTS
 
1.  OPERATIONS AND BASIS OF PRESENTATION:
 
     BASIS OF STATEMENTS
 
     The accompanying statements of assets and liabilities of the Hard Disk
Drive Division ("the Division") of Moduler Electronics (India) Private Limited
("the Company") as of January 31, 1995 and January 28, 1996 and the related
statements of revenues and expenses and of cash flows for the period from
February 1, 1995 to January 28, 1996 ("the statements") have been prepared in
conformity with generally accepted accounting principles in the United States of
America, from the accounting books and records maintained by the Company at
Madras, India. The statements have been prepared for the purpose of inclusion in
the registration statement on Form S-4 to be filed by JTS Corporation ("JTS",
formerly JT Storage, Inc.) in compliance with the rules and regulations of the
Securities and Exchange Commission. The Form S-4 filing of JTS is pursuant to
its proposed acquisition of Atari Corporation ("Atari"). In April 1996, JTS
acquired 90% of the outstanding equity shares of the Company. The Division is
likely to be the only remaining business of the Company after the transfer of
the Voice Coil Magnetic Assembly ("VCMA") business to an entity owned by the
Chairman of the Company and his family members. As of April 4, 1996, this
transfer had been made, subject to completion of legal documentation.
 
     Although the Company began business in fiscal 1986, the Division first
began significant operations in fiscal 1996. Division operations prior to fiscal
1996 were insignificant; accordingly, the accompanying financial statements
include the Statements of Assets and Liabilities of the Division as of January
28, 1996 and January 31, 1995 and the related Statement of Revenues and Expenses
for the period from February 1, 1995 to January 28, 1996. These statements were
prepared from the Balance Sheet and the Income Statement, respectively, of the
total businesses of the Company, from which balances and transactions relating
to the businesses that are being divested were excluded.
 
     The Division developed its disk drive manufacturing capabilities during
fiscal 1996 which has resulted in an operating loss and a working capital
deficit of $6,459,000. In addition, the Company will require additional capital
in order to achieve volume production. The Division's disk drive production is
dedicated exclusively to JTS and JTS has recently completed its acquisition of
90% of the Division. The auditors' report on the JTS financial statements dated
April 4, 1996 contains a paragraph regarding a substantial doubt regarding the
ability of JTS to continue as a going concern. These factors raise a substantial
doubt about the Division's ability to continue as a going concern. As discussed
above, JTS plans to merge with Atari. In the opinion of management, the Atari
merger, if successful, would raise capital adequate to fund operations for the
next 12 months.
 
     Since the Company did not maintain separate accounting records for the
Division, certain estimates, which management believed to be reasonable, were
required in order to segregate the Division's account balances as of January 31,
1995 as well as to reflect the proposed divestiture of other businesses as of
January 28, 1996. The segregation of account balances relating to the Division
was made on the following bases:
 
     - Identification basis -- Account balances relating to assets, liabilities,
       revenues and expenses ("account balances") pertaining to the Division
       were specifically identified and segregated.
 
     - Agreed basis -- Account balances which have been specifically agreed to
       be assumed by the Division were identified and segregated.
 
     - Transfer basis -- Account balances pertaining to other businesses which
       were being divested, were identified and excluded.
 
                                      F-42
<PAGE>   103
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     - Allocation basis -- Account balances related to expenses incurred by the
       Company for the Division have been included in total as the Division was
       the significant portion of the Company's operations for fiscal 1996.
 
     INCORPORATION
 
     The Company was incorporated on March 24, 1986 as a private company under
the Indian Companies Act, 1956 in the state of Maharashtra. The Company is owned
principally by Asperal Holdings, Inc. and Dexar Holdings, Inc., companies
registered in Panama, which have a 45% equity stake each. The remaining 10% of
the Company's outstanding equity shares are owned by the Chairman of the
Company, Mr. Manohar Lal Tandon, and his relatives ("the Tandon Family").
 
     The Company was established to operate a 100 percent Export Oriented Unit
("EOU") in the Madras Export Processing Zone ("MEPZ"), a free trade zone
established by the Government of India at Madras, Tamil Nadu, India. The
Company's industrial unit is located in a government provided low cost standard
design factory within the MEPZ. The Company initially undertook the manufacture
of computer hard disk drive components such as Head Gimble Assemblies ("HGA")
and Head Stack Assemblies ("HSA"). During the first five years of operations,
the Company diversified its product line to include two other products, namely,
VCMA and Switch Mode Power Supplies ("SMPS").
 
     During fiscal 1994, the Company closed its SMPS division and established
another EOU for the assembly of hard disk drives. Under the approval obtained
from the Government of India in September 1994, the Company was originally
licensed to manufacture, on an average, 286,000 hard disk drives annually. In
November 1995, the Company obtained a revised approval to manufacture, on an
average, 807,000 hard disk drives and 418,000 subassemblies (i.e., HGAs and
HSAs) annually. In December 1994, the Company discontinued production of HGAs
and HSAs for customers other than JTS, with which it began collaborations to
manufacture hard disk drives.
 
     Though the Division started shipping nominal quantities in January 1995,
commercial production of hard disk drives commenced only in October 1995. The
Company continued to produce VCMAs until January 18, 1996 when the VCMA business
was transferred to a related party. Prior to its divestiture, a portion of the
voice coil assemblies produced by the VCMA business was used in the manufacture
of hard disk drives, while the rest were sold to a related party. Except for the
VCMA business, the Company operated as a captive manufacturer for JTS during
fiscal 1996. With its association, JTS has assumed operational and management
control of certain portions of the Division and has provided financing for the
hard disk drive business and corporate support in areas such as process
engineering, tooling, vendor selection and financial management. Since assuming
operational control, JTS has employed several expatriates consisting of disk
drive industry professionals who have filled senior positions in engineering,
manufacturing, quality control and materials management functions of the
Division.
 
     Export Oriented Unit
 
     In order to encourage export oriented businesses and foreign currency
inflows, the Government of India offers special incentives to EOUs established
in export processing zones such as state grants and subsidies, exemptions
relating to import licenses, exemptions from payment of customs duty on imported
inputs and excise duty on local material procurements, and allotment of low cost
factory space. Such EOUs are also exempted from payment of corporate income
taxes for a block of five years during the first eight years of operations,
subject to fulfillment of certain conditions. Currently, export earnings
received in convertible foreign currency continue to be exempt from tax, even
after the tax holiday period.
 
                                      F-43
<PAGE>   104
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Current Operations
 
     The Division currently manufactures hard disk drives with different
capacity points, based on technical know-how and designs provided by JTS. The
Division's products are marketed through JTS under the trade names Palladium and
Nordic, and are sold to original equipment manufacturers and system integrators
who incorporate the products into desktop and notebook computers. The Division
remained in development stage until October 1995 when it first started shipping
commercial quantities.
 
     Sources of Supply
 
     Many components incorporated in, or used in the manufacture of, the
Division's products are currently sourced from a single supplier. JTS procures
components for the Division, which it purchases from third party manufacturers
and in turn sells or consigns to the Division. JTS' customers have placed
certain restrictions on vendor and design changes.
 
     The Division purchases all of its components and equipment pursuant to
purchase orders placed from time to time and has no guaranteed supply
arrangements. In the past, there have been certain instances of supply shortages
which had caused delays in manufacturing and loss of sales. Supply shortages
resulting from a change in suppliers could cause a delay in manufacturing and
possible loss of sales, which would have a material adverse impact on the
Division's operating results. Further, the Division produces in-house a number
of critical subassemblies incorporated in the final hard disk drive product.
Failure to produce these subassemblies in adequate quantity or quality could
also adversely impact the operating results of the Division.
 
     Manufacturing Relationships
 
     In the past, the Company has sold subassemblies and other components to
Xyratex in Havant, United Kingdom for the manufacture of hard disk drives under
a subcontract manufacturing agreement between Xyratex and JTS. With the
commencement of commercial production of hard disk drive products by the Company
in October 1995, the Division stopped supplying Xyratex.
 
2.  SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES:
 
     Foreign Currency Translation
 
     The Division has determined the United States ("US") dollar to be its
functional currency, in accordance with the Statement of Financial Accounting
Standards No 52, "Foreign Currency Translation", based on indicators such as
cash flows, sales market, sales price, expense, financing and inter-company
transactions and arrangements. Since the Division's books are maintained in
Indian rupees which is not its functional currency, account balances were first
remeasured in US dollar. Since the Division's functional and reporting
currencies are the same, the remeasurement process is intended to produce the
same result as if the Division's books had been maintained in the functional
currency, and obviates separate translation.
 
     Nonmonetary assets and liabilities such as inventories, plant and equipment
and accumulated depreciation thereon have been remeasured using historical
currency exchange rates prevailing at the dates transactions relating to such
elements were recognized in the statements. Expenses related to such nonmonetary
assets and liabilities such as manufacturing overhead costs included in cost of
goods sold have been remeasured using average exchange rates for the period to
approximate remeasurement at the historical exchange rates prevailing at the
dates those elements were recognized in the statements.
 
     All other monetary assets and liabilities that are not denominated in the
Division's functional currency have been translated at the current exchange
rates prevailing on the dates of the statements. Exchange gains
 
                                      F-44
<PAGE>   105
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
and losses from such translation of monetary assets and liabilities have been
recognized in determining net loss for the current period.
 
     Certain expenses and cash flows have been translated at average exchange
rates for the period to approximate translation at the exchange rates prevailing
at the dates those elements were recognized in the statements.
 
     Gains and losses on foreign currency transactions have been included in
determining net loss for the current period in the Statement of Revenues and
Expenses.
 
     Pervasiveness of Estimates
 
     The preparation of 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 as of the dates of the statements and the
related amounts of revenues and expenses during the reporting period. The
Company has maintained its books of accounts in accordance with Indian
accounting standards and in the local currency, the Indian rupee. As discussed
above, the Division's statements have been remeasured into US dollar in
accordance with the Statement of Financial Accounting Standards No 52. As
discussed in Note 1, certain assumptions and estimates which, management
believed to be reasonable, were required to segregate the Division's account
balances from those relating to the rest of the Company's businesses as of
January 31, 1995 and to reflect the divestiture of other businesses as of
January 28, 1996. Actual results could have been different from these estimates
and remeasurements.
 
     Revenue Recognition
 
     Revenues on product sales are recognized at the time of shipment and
include incentives provided by the Government of India on export sales.
Substantially, all shipments are sent directly to JTS' end customers, but are
invoiced by the Division to JTS, which in turn bills and collects from the end
customers.
 
     The Division's accounts receivables as of the dates of the statements
comprised of receivables outstanding from JTS arising from sale of hard disk
drives and receivables from a related party arising from sale of VCMAs. The
Company has not experienced bad debts associated with either of these customers
in the past, and accordingly, has not recorded an allowance for doubtful
accounts.
 
     Due from Other Business Units, Net
 
     As of January 31, 1995, due from other business units represent the excess
of assets over liabilities of the Company's businesses excluding the Division.
Such receivables are expected to be collected within the next twelve months.
 
     Inventories
 
     Inventories include direct materials, freight thereon, direct labor and
related manufacturing overhead costs. The Division values its inventories at
cost, determined on first in, first out ("FIFO") basis, or market value,
whichever is lower.
 
                                      F-45
<PAGE>   106
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Inventories consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                                JANUARY 28,     JANUARY 31,
                                                                   1996            1995
                                                                -----------     -----------
        <S>                                                     <C>             <C>
        Raw materials.........................................    $ 2,520         $ 1,225
        Work-in-process.......................................      1,660              71
        Finished goods........................................      1,803              --
                                                                   ------          ------
                                                                  $ 5,983         $ 1,296
                                                                   ======          ======
</TABLE>
 
     JTS and the Division have an agreement whereby JTS has undertaken to bear
all inventory losses the Division might incur by repurchasing such inventories
from the Division at their carrying value. As of January 28, 1996, JTS assumed
inventory valued at $2,747,802, which is netted against the inventory balance
shown above.
 
     Plant and Equipment
 
     Plant and equipment is recorded at cost and depreciation is computed using
the straight line method over the estimated useful lives of the assets.
 
     Plant and equipment consist of the following (in thousands):
 
<TABLE>
<CAPTION>
                                                          ESTIMATED
                                                         USEFUL LIFE     JANUARY 28,     JANUARY 31,
                                                           (YEARS)          1996            1995
                                                         -----------     -----------     -----------
    <S>                                                  <C>             <C>             <C>
    Machinery and equipment............................     2 - 7          $ 6,703         $ 2,237
    Furniture, fixtures and miscellaneous assets.......     2 - 6              288             129
                                                            -----          -------          ------
                                                                             6,991           2,366
    Less -- Accumulated depreciation...................                     (1,388)           (721)
                                                                           -------          ------
                                                                           $ 5,603         $ 1,645
                                                                           =======          ======
</TABLE>
 
     Costs of normal repairs and maintenance are expensed as incurred. Major
replacements or betterments of plant and equipment are capitalized. When items
are sold or otherwise disposed of, the cost and related accumulated depreciation
are removed from the accounts and any resulting gain or loss is included in
determining net loss. The amount expensed for repairs and maintenance for the
period from February 1, 1995 to January 28, 1996 was $494,104.
 
     The Division has certain specialized manufacturing equipment used in its
operations.
 
     Income Tax
 
     Under the Indian Income Tax Act, 1961, the Division, being an EOU located
in an export processing zone, is exempted from payment of corporate income taxes
for a block of five years during the first eight years of operations, subject to
fulfillment of certain conditions.
 
     The Division continues to be exempt from income tax to the extent of income
attributable to the export sales of the Division. As the Division did not have
any taxable income for the period from February 1, 1995 to January 28, 1996, no
provision for income tax has been made.
 
                                      F-46
<PAGE>   107
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Warranty Costs
 
     The Division manufactures disk drive products to customer specifications
and components for such disk drives are sourced from vendors specified by JTS.
JTS generally provides a three year limited warranty on the Palladium and Nordic
drives manufactured by the Division and has agreed to bear the costs of all
warranty claims, product returns and rework charges. Accordingly, no warranty
cost has been recorded in the Division's statements as of January 28, 1996 and
January 31, 1995.
 
     Prior to the divestiture of the Company's VCMA business, voice coil
products were manufactured and sold principally to a related party which
provided product specifications and mandated specific component sources. No
provision has been provided for any warranty costs on the voice coils sold prior
to the divestiture since the related party, to which the VCMA business is being
sold, has agreed to assume any claims related to such products.
 
     Supplemental Disclosure of Cash Flow Information
 
     For the purposes of the Statement of Cash Flows, the Division considers all
highly liquid investments purchased with original maturities of 90 days or less
to be cash equivalents. The carrying amounts reported in the statements of
assets and liabilities for cash and cash equivalents approximate their fair
values. Cash paid for interest for the period from February 1, 1995 to January
28, 1996 was $404,522. During fiscal 1996, the Company entered into capital
lease obligations amounting to $36,170. The Company also financed the purchase
of equipment amounting to $2,657,145 with secured long-term loans (Note 5).
 
     During the period from February 1, 1995 to January 28, 1996, the Division
received equipment and inventories amounting to $2,569,471 and $6,748,512,
respectively, from related parties. These were recorded as due to related
parties in the Statement of Cash Flows since they are non-cash transactions.
 
3.  RESTRICTED CASH BALANCES:
 
     Restricted cash balances comprise margin money deposits with banks
amounting to $380,013 and $197,578 as of January 28, 1996 and January 31, 1995
respectively. These deposits are maintained as security against letters of
credit issued by banks on behalf of the Division (see Note 4 below). During the
period from February 1, 1995 to January 28, 1996, rates of interest on these
deposits ranged from 9 to 12% per annum.
 
4.  SECURED SHORT TERM BORROWINGS:
 
     The Company has entered into an agreement with a consortium of three Indian
Government owned commercial banks to obtain working capital credit facilities.
The consortium was established in February 1995. 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 lead bank in
the consortium, Indian Bank, has fully sanctioned its limit, while the other two
banks have only partially sanctioned their participation as of January 28, 1996.
 
     The credit agreement with the consortium has four separate facilities,
namely, export sales accounts receivable bill discounting ("bill discounting"),
exports sales order based inventory packing credit ("packing credit"), foreign
letters of credit ("letters of credit" or "LC"), and letters of guarantee
("guarantee").
 
     Bill discounting is a post-shipment credit facility used to finance export
receivables. Under the Company's bill discounting lines, export invoices are
presented to the bank, upon which the bank advances funds for the full value of
the invoice. Bills are typically discounted for ninety days. This facility is
self-
 
                                      F-47
<PAGE>   108
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
liquidating in nature whereby advances made by the bank to the Company against
bills discounted are settled through direct retirement of bills by the foreign
customers.
 
     Under the packing credit advance which is a pre-shipment facility, the bank
finances procurement of inventories and other costs incurred for fulfillment of
the Division's export orders. The advances under this facility are liquidated
using the proceeds of bills discounted by the Division. The Division has been
fully utilizing its sanctioned credit limits on its bill discounting and packing
credit facilities, and therefore the total credit availed by the Division
facilitates a continuous rotation of its inventory and invoice financing
requirements.
 
     Under the letter of credit facility, the bank guarantees timely payments to
the Division's foreign suppliers. Letter of credit is a non-funded limit which,
when issued, results in a contingent liability to the Division. The Division is
obligated to pay the bank at the time the bank remits money against documents
presented by the foreign supplier. Contingent liabilities arising from the use
of letters of credit have not been included in the Division's statements but
have been disclosed in Note 7 below.
 
     Letters of guarantee are provided by the bank on behalf of the Division to
third parties with which it has business dealings, to guarantee due performance
of contracts as well as fulfillment of monetary obligations by the Division.
 
                                      F-48
<PAGE>   109
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Following table summarizes details relating to the credit facilities
described above (in thousands):
 
<TABLE>
<CAPTION>
                                                                       STATE BANK OF   STATE BANK OF
                                                       INDIAN BANK      TRAVANCORE       HYDERABAD
                                                     ---------------   -------------   -------------
                    PARTICULARS                       1996     1995     1996    1995   1996    1995
- ---------------------------------------------------  ------   ------   ------   ----   -----   -----
<S>                                                  <C>      <C>      <C>      <C>    <C>     <C>
1. Available lines of credit
  (a) Bill Discounting.............................  $3,925   $  972   $1,389   $ --   $ 139   $ 222
  (b) Packing Credit...............................     834      556       --     --      83      --
  (c) Letters of Credit............................   2,431    1,111    1,216     --     361     361
  (d) Letters of Guarantee.........................      28       28       --     --      --      --
2. Amount outstanding
  (a) Bill Discounting.............................   3,878      165    1,277     --     143      --
  (b) Packing Credit...............................     503      202       --     --      80      --
  (c) Advances for overdue letters of credit.......     204       --       --     --      --      --
  (d) Letters of Credit............................   2,268       --      784     --     279      --
  (e) Letters of Guarantee.........................      --       --       --     --      --      --
3. Amount by which sanctioned limits have been
   exceeded
  (a) Bill Discounting.............................      --       --       --     --       4      --
  (b) Packing Credit...............................      --       --       --     --      --      --
  (c) Letters of Credit............................      --       --       --     --      --      --
  (d) Letters of Guarantee.........................      --       --       --     --      --      --
4. Interest rates
  (a) Bill Discounting
      --if availed in US Dollars...................     7.5%     6.5%     7.5%    --     7.5%    6.5%
      --if availed in Indian Rupees................   13-15%   13-15%   13-15%    --   13-15%  13-15%
  (b) Packing Credit
      --if availed in US Dollars...................     7.5%     6.5%      --     --     6.5%     --
      --if availed in Indian Rupees................   13-15%   13-15%      --     --   13-15%     --
5. Margin
  (a) Packing Credit...............................      25%      10%      --     --      25%     --
  (b) Letters of Credit............................      10%      10%      10%    --      10%     10%
  (c) Letters of Guarantee.........................   10-50%   10-50%      --     --      --      --
</TABLE>
 
     Bill discounting agreements are secured by export receivables. Packing
credit agreements are secured by a first charge on the Company's stocks of raw
materials, work in process and finished goods inventories.
 
     Outstanding letters of credit are secured by a charge on goods covered
under the letter of credit and a lien on deposits made by the Company with the
banks.
 
     Letters of guarantee are secured by counter guarantees issued by the
Company and a lien on deposits made by the Company with the banks.
 
     All the above agreements and facilities are fully covered by the personal
guarantee of the Chairman of the Company. The banks have sought for a second
collateral on the Company's plant and equipment, present and future, which have
already been used as collateral for the Company's secured long term loans (see
Note 5 below). As of the date of the statements, the Company was in the process
of fulfilling this requirement.
 
                                      F-49
<PAGE>   110
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     According to the terms stipulated in the credit facility sanction letter of
Indian Bank, the Company's owners were required to contribute unsecured loans of
approximately $1.8 million and increase the paid-in capital of the Company to
$611,281 (from $69,463) before September 30, 1995. The Company has not fulfilled
this requirement as of the date of the statements. However, the Company has
obtained an undertaking from JTS, that advances made to the Division by JTS to
the extent of $2,558,650, will not be withdrawn or adjusted, either in part or
full, against the bills drawn by the Division, and, in due course, will be
converted into equity capital/unsecured loan.
 
5.  SECURED LONG TERM LOANS:
 
     The Company has entered into term loan agreements with the Industrial
Credit and Investment Corporation of India Limited ("ICICI"), a term lending
institution in India. In September 1992, the Company was sanctioned a rupee loan
of approximately $571,429 for the purpose of augmenting its existing
manufacturing facilities. Approximately $304,713 was available to the Company to
borrow as of January 31, 1995, subsequent to which the Company decided not to
fully avail of this loan before the last date of withdrawal, February 15, 1995.
The loan is repayable in Indian rupees in 12 equal quarterly installments of
approximately $19,450 each commencing from May 1995. Interest on outstanding
amounts are payable quarterly at the rate of 20% per annum.
 
     In October 1994, the Company was sanctioned an additional loan by the
ICICI, for approximately $2,550,000, denominated in four foreign currencies, for
the import of capital equipment. The Division had not borrowed against the loan
as of January 31, 1995, and had utilized the loan for a US dollar equivalent
amount of $2,625,758 as of January 28, 1996. As of January 28, 1996 there were
immaterial unutilized balances in three of the four foreign currencies under the
loan, which were cancelled by ICICI on February 22, 1996 based on a written
request by the Company. The loan is repayable in US dollar in 13 equal quarterly
installments of $201,981 each commencing from April 1997. Interest on
outstanding amounts is payable quarterly at the rate of US dollar LIBOR plus
2.75% per annum. For the period from February 1, 1995 to January 28, 1996, the
interest rates on this loan ranged from 8.7 to 9.5% per annum.
 
     Both loans are secured by all of the Company's property and equipment and
are fully covered by the personal guarantee of the Chairman of the Company.
According to the terms of the agreement for the foreign currency loan, the
Company's promoters were required to contribute unsecured loans of approximately
$1.8 million and increase the paid-in capital of the Company to $611,281 (from
$69,463). Though this amount has not been contributed by the owners as of the
date of the statements, the Company has obtained an undertaking from JTS, that
advances made to the Division by JTS to the extent of $2,558,650, will not be
withdrawn or adjusted, either in part or full, against the bills drawn by the
Division, and, in due course, will be converted into equity capital/unsecured
loan.
 
     In addition to the ICICI term loans, the Company has entered into a term
loan agreement with Corporation Bank, a Government owned commercial bank in
India, for the purchase of automobiles. As of January 28, 1996, the Division had
utilized approximately $31,386 of the total sanctioned amount of $41,678. The
loan is secured by the automobiles and is repayable in thirty equal monthly
installments of $1,047 each.
 
                                      F-50
<PAGE>   111
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     Future repayments under the Division's long-term loans are as follows (in
thousands):
 
<TABLE>
<CAPTION>
                                 YEAR ENDING                   LOAN REPAYMENTS
                ---------------------------------------------  ---------------
                <S>                                            <C>
                1997 (current portion of long term loans)....      $    90
                1998.........................................          898
                1999.........................................          834
                2000.........................................          808
                2001.........................................          202
                                                                    ------
                                                                   $ 2,832
                                                                    ======
</TABLE>
 
6.  DUE TO RELATED PARTIES, NET:
 
<TABLE>
<CAPTION>
                                                                      1996       1995
                                                                     ------     ------
                                                                      (IN THOUSANDS)
        <S>                                                          <C>        <C>
        Due from related parties
        Ultra Tek Devices Limited..................................  $   62     $   80
        Tantec Magnetics...........................................     318         --
        Eastern Peripherals Limited................................      --         65
        Memory Electronics.........................................      --         18
        Golden Computers Limited...................................      --        120
        Advance Technology Devices.................................      --         92
                                                                     ------     ------
                  Total............................................     380        375
                                                                     ------     ------
        Due to related parties
        JTS........................................................   1,158        667
        Nidec Corporation..........................................     367         --
        Tandon Family..............................................      14         16
        Tantec Magnetics...........................................      --        271
        Tandon Associates, Inc.....................................      --        603
        Reliable Consultancy Services Private Limited..............      --          1
        Tancom Electronics.........................................       9         78
                                                                     ------     ------
                  Total............................................   1,548      1,636
                                                                     ------     ------
        Net due to related parties.................................  $1,168     $1,261
                                                                     ======     ======
</TABLE>
 
     See Note 8 for a description of the relationships and the nature of
transactions between the Division and the above related parties.
 
                                      F-51
<PAGE>   112
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
7.  COMMITMENTS AND CONTINGENCIES:
 
     Capital Leases
 
     The Company has purchased automobiles through certain capital lease
agreements. The gross amount of assets acquired under capital leases and
capitalized was $38,673 as of January 28, 1996. Following is a schedule of
aggregate future minimum lease payments under these capital leases together with
the present value of net minimum lease payments as of January 28, 1996 (in
thousands):
 
<TABLE>
<CAPTION>
                                                                         FUTURE MINIMUM
                                  YEAR ENDING                            LEASE PAYMENTS
        ---------------------------------------------------------------  --------------
        <S>                                                              <C>
        1997...........................................................       $ 19
        1998...........................................................         15
        1999...........................................................         14
                                                                               ---
        Total net minimum lease payments...............................         48
        Less -- Amount representing interest...........................         12
                                                                               ---
        Present value of net minimum lease payments....................         36
        Less -- Current portion........................................         15
                                                                               ---
                                                                              $ 21
                                                                               ===
</TABLE>
 
     Purchases
 
     Open letters of credit for import of raw materials in the normal course of
business amounted to $3,594,360 as of January 28, 1996 (see Note 4 above).
 
     Obligations to Employees
 
     The Company has made certain statutory minimum contributions towards
employee obligations as required by labor laws enacted by the Government of
India. These include, inter alia, minimum wages, provident fund, employee state
insurance, bonus, gratuity, earned leave and labor welfare fund.
 
8.  RELATED PARTY TRANSACTIONS:
 
     As discussed in Note 1 above, the Division has functioned as a
manufacturing arm of JTS since its association with JTS. Apart from JTS, the
Division's related parties include Xyratex (former subcontractor of JTS), Nidec
Corporation (supplier to the Company and an equity investee in JTS), and
entities which are owned and/or controlled by the Chairman of the Company or his
relatives.
 
     JTS loaned manufacturing equipment with an historical cost of approximately
$4,400,000 and $530,000 located at the Division at January 28, 1996 and January
31, 1995.
 
     The Division's related party transactions during the period from February
1, 1995 to January 28, 1996 primarily consist of transactions with JTS and
Xyratex. These transactions include, inter alia, purchase of fixed assets and
raw materials from JTS, receipt of certain fixed assets on loan basis from JTS,
receipt of certain raw material free of cost from JTS, sale of disk drives to
JTS, advances received from JTS, remittances made to JTS, assumption of obsolete
inventories and warranty costs by JTS, sale of subassemblies and raw material to
Xyratex, and purchase of tools from Xyratex. Since the VCMA business was part of
the Company until January 28, 1996, transactions between the Division and the
VCMA business have not been considered as related party transactions.
 
                                      F-52
<PAGE>   113
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
     The net balances due from or to each related party as of January 28, 1996
and January 31, 1995 for sales, purchases, advances, transfers and sharing of
expenses are disclosed in Note 6 above. Summarized information relating to such
transactions for the period from February 1, 1995 to January 28, 1996 are
presented below (in thousands):
 
<TABLE>
<CAPTION>
          NAME OF THE RELATED PARTY                NATURE OF TRANSACTION             AMOUNT
    -------------------------------------  --------------------------------------    -------
    <S>                                    <C>                                       <C>
    Nidec Corporation....................  Purchase of raw material                  $   701
                                           Payment for purchase of raw material          522
    Tandon Associates, Inc...............  Payment for purchases                         957
    Tancom Electronics...................  Purchase of plant and equipment                42
                                           Sale of raw material                           41
                                           Proceeds from sale of raw material             55
                                           Charges for common expenses received            3
                                           Advance to Tancom                              10
    JTS..................................  Purchase of plant and equipment             2,569
                                           Purchase of raw material                    6,621
                                           Payment for purchase of raw material        1,052
                                           Advance against export                      2,559
                                           Product sales                              14,892
                                           Receipt from product sales                  8,495
                                           Assumption of obsolete inventories and      2,919
                                             warranty costs by JTS
    Tantec Magnetics.....................  Purchase of raw material                      110
                                           Product sales                                 465
</TABLE>
 
     The Company has been capitalized since inception with 200,000 shares of
equity stock at a par value of Indian rupees 10 each and 5,000 shares of
preferred stock at a par value of Indian rupees 100 each. The Company's lone
preferred stock shareholder is the son of the Chairman of the Company. As part
of the transfer of the Company's VCMA business to a related party and the
proposed acquisition of the Division by JTS, it was decided in March 1995 to
retire the preferred stock of the Company. Effective January 28, 1996, all
preferred shares were retired for a consideration of Indian rupees 500,000
($13,893). As of January 28, 1996, this amount has been included in "Due to
related parties, net" (see Note 6 above).
 
                                      F-53
<PAGE>   114
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
                See notes to consolidated financial statements.
 
9.  OTHER MATTERS:
 
     Technical Know-how and Collaboration Agreement
 
     Foreign currency transactions with parties outside India are subject to
controls imposed by the Reserve Bank of India ("RBI"), India's central bank.
Funds can only be remitted for payments against specific invoices for receipt of
materials or equipment and certain additional limited uses. Except for payments
below $5,000, cash in advance or deposit payments are not freely permitted to
parties outside the country. As part of the Company's disk drive EOU project
approval, the Government has allowed the Company to pay $2 million to JTS for
technical know-how fees. The Company is yet to finalize its agreement with JTS
for the payment of technical know-how fees as of the date of the statements. The
Division has not recorded any liability for possible future payment of technical
know-how fees due to the anticipated acquisition of the Company by JTS. The
Company's term loan agreements with ICICI contains certain restrictions on the
timing and period of payment of technical know-how fees.
 
     Divestiture of Voice Coil Business
 
     The Company transferred the VCMA business, after write-offs of
approximately $350,000 of related party balances, to Tancom Electronics
("Tancom") as of January 28, 1996. Such transfer included plant and equipment
and inventories of the VCMA business, along with certain other assets and
liabilities.
 
     Tancom is owned and controlled by the Chairman of the Company and his
family members and is therefore considered a related party. Retained earnings
attributable to the VCMA business since April 1, 1994 less advances made to
certain related parties were also transferred to Tancom. The Division expects to
continue to purchase voice coil assemblies from Tancom, provided their prices
remain competitive. The Division has not entered into any agreement mandating
the purchase of voice coil assemblies from Tancom.
 
     As of January 28, 1996, the total value of assets transferred to Tancom was
$558,146 and the total value of liabilities transferred totalled $28,148.
Retained earnings of the VCMA business transferred to Tancom totalled $418,493.
Accounts receivable of $428,080 and accounts payable of $236,163 relating to the
voice coil business, outstanding as of January 28, 1996 has been included in the
Statement of Assets and Liabilities of the Division due to regulatory
constraints on transfer of foreign currency receivables and payables. All of the
accounts receivables of the VCMA business are owing from Tantec Magnetics, a
related party to the Company.
 
10.  SUBSEQUENT EVENTS:
 
     New Long Term Loan
 
     On February 20, 1996, the Company was sanctioned an additional foreign
currency loan of $10 million, to be reduced to the extent of participation by
other institutions, by the ICICI for the proposed expansion of its disk drive
business. The Company had received a letter of intent ("letter") from the ICICI
the terms and conditions of which have to be agreed upon by the Company within
30 days before a formal foreign currency loan agreement ("loan agreement") could
be executed by both parties. Interest on this proposed loan shall be payable at
the lending rates of the ICICI prevailing on the date of execution of the loan
agreement. Lending rates of the ICICI are US dollar LIBOR, plus a fixed percent,
if the funds are provided out of the floating rate US dollar funds, and a fixed
rate per annum, if the funds are provided out of fixed rate US dollar funds.
According to the letter, this loan will be secured by a first charge on all of
the Company's equipment, both present and future, subject to any prior charge on
specified equipment in favor of the Company's banks. The
 
                                      F-54
<PAGE>   115
 
                        THE HARD DISK DRIVE DIVISION OF
                  MODULER ELECTRONICS (INDIA) PRIVATE LIMITED
                        (CURRENCY: UNITED STATES DOLLAR)
 
                  NOTES TO FINANCIAL STATEMENTS -- (CONTINUED)
 
Company is also required to provide an irrevocable and unconditional guarantee
from the Chairman in favor of ICICI for due repayment of the loan along with all
interest and any other moneys. Further, for the loan to become effective, the
Company would have to raise $5,584,885 by issue of equity shares to promoters,
obtain an unsecured loan of $3,601,000 and state subsidies of $236,177 to meet a
part of the cost of the project.
 
     On March 18, 1996, the Company entered into a loan agreement with the ICICI
for $7 million towards their participation in the total sanctioned amount of $10
million. The loan is repayable in US dollar in 12 equal quarterly installments
of $583,333 each commencing form May 20, 1998. The Company has procured an
irrevocable and unconditional guarantee from the Chairman of the Company as
required by the letter of intent. The funding of this loan by ICICI is dependent
upon the Company's compliance with the pre-disbursement conditions relating to
raising of additional equity capital and obtaining of unsecured loans and state
subsidies, mentioned above. If the Company does not comply with these
pre-disbursement conditions, the previously obtained loans from ICICI (see Note
5) could be held in default and ICICI may have the right to recall the earlier
loans, besides not funding the current loan.
 
                                      F-55
<PAGE>   116
 
                                JTS CORPORATION
 
          UNAUDITED PRO FORMA CONDENSED COMBINED FINANCIAL STATEMENTS
 
     The following unaudited pro forma condensed combined financial statements
give effect to the merger of Atari and JTS which occurred on July 30, 1996 which
was accounted for as a purchase of JTS by Atari. Although the business
combination resulted in Atari merging into the JTS legal entity, the substance
of the transaction is that Atari, a public company with substantially greater
operating history and net worth, owns approximately 62% of the combined equity.
 
     The aggregate purchase price of $112.5 million has been allocated to the
acquired assets and liabilities of JTS. Included in the pro forma purchase price
are the approximately 40 million shares of outstanding common stock of JTS, the
value of the assumed JTS options and warrants of $11.1 million and the direct
transaction costs of $1.4 million. The common stock, options and warrants were
valued using $2.50 per share which is the representative value of Atari stock at
the time the proposed transaction was announced. The Company allocated $133.6
million to purchased technology, $110.0 million of which represented in-process
research and development. The $110.0 million was expensed upon the closing of
the Merger as the technology had not yet reached technological feasibility and
does not have alternative future uses.
 
     The unaudited pro forma condensed combined statements of operations for the
year ended December 31, 1995 give effect to the merger as if the acquisition was
completed at the beginning of the year and combines Atari's statement of
operations as of December 31, 1995 with the pro forma combined statement of
operations for JTS and Moduler Electronics for the year ended January 28, 1996.
The unaudited pro forma condensed combined statements of operations for the nine
months ended October 27, 1996 give effect to the merger with Atari as if the
acquisition was completed at the beginning of the year and combines Atari's
statement of operations with the JTS and Moduler Electronics pro forma statement
of operations for the nine months ended October 27, 1996. Such statements do not
include the effect of the approximately $110.0 million nonrecurring charge for
in-process research and development. Such statements also exclude Atari's
extraordinary gain generated from the Atari Debentures extinguished in 1995 and
the $3.9 million gain on sale of marketable securities in the first quarter of
1996. The unaudited pro forma condensed combined balance sheet has been omitted
as the consolidated balance sheet as of October 27, 1996, included elsewhere
herein, reflects both of these transactions.
 
     This method of combining historical financial statements for the
preparation of the pro forma condensed combined statements is for presentation
only. Actual statements of operations of the companies will be combined from the
closing date of the acquisition with no retroactive restatements. The unaudited
pro forma condensed combined financial statements are provided for illustrative
purposes only and is not necessarily indicative of the combined results of
operations that would have been reported had the Merger with Atari and the
acquisition of Moduler Electronics occurred on the dates indicated, nor do they
represent a forecast of the combined results of operations for any future
period. The unaudited pro forma condensed combined financial statements should
be read in conjunction with the historical financial statements and accompanying
notes for Atari, and JTS and Moduler Electronics.
 
                                      F-56
<PAGE>   117
 
                                JTS CORPORATION
                         UNAUDITED PRO FORMA CONDENSED
                       COMBINED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                            PRO FORMA
                                                          COMBINED JTS
                                                           AND MODULER
                                     ATARI                 ELECTRONICS
                               NINE MONTHS ENDED        NINE MONTHS ENDED         PRO FORMA      PRO FORMA
                               OCTOBER 27, 1996         OCTOBER 27, 1996         ADJUSTMENTS     COMBINED
                               -----------------     -----------------------     -----------     ---------
<S>                            <C>                   <C>                         <C>             <C>
NET REVENUES.................       $ 2,972                 $  65,849                            $  68,821
                                   --------                  --------                             --------
COST AND EXPENSES:
  Cost of revenues and
     inventory write-downs...         5,334                    78,531                               83,865
  Research and development...           650                    20,083                               20,733
  Sales, marketing, general
     and administrative......         2,958                     9,549                1,924(b)       21,258
                                   --------                  --------                             --------
                                                                                     5,886(a)
                                                                                       941(c)
     Total operating
       expenses..............         8,942                   108,163                              125,856
OPERATING LOSS...............        (5,970)                  (42,314)                             (57,035)
  Gain on sale of marketable
     securities..............         3,930                        --               (3,930)(f)          --
  Other expense, net.........          (647)                     (141)                  --            (788)
  Interest income............           653                       173                 (452)(e)         374
  Interest expense...........         1,708                     2,497                 (452)(e)       3,753
                                   --------                  --------                             --------
NET LOSS.....................        (3,742)                  (44,779)                             (61,202)
                                   ========                  ========                             ========
LOSS PER COMMON SHARE........                                                                        (0.59)
Number of shares used in
  computation................                                                             (d)      103,658
</TABLE>
 
   See notes to unaudited pro forma condensed combined financial statements.
 
                                      F-57
<PAGE>   118
 
                                JTS CORPORATION
                         UNAUDITED PRO FORMA CONDENSED
                       COMBINED STATEMENTS OF OPERATIONS
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)
 
<TABLE>
<CAPTION>
                                                                 PRO FORMA
                                                             COMBINED JTS AND
                                               ATARI        MODULER ELECTRONICS
                                            YEAR ENDED          YEAR ENDED          PRO FORMA     PRO FORMA
                                           DEC. 31, 1995       JAN. 28, 1996       ADJUSTMENTS    COMBINED
                                           -------------    -------------------    -----------    ---------
<S>                                        <C>              <C>                    <C>            <C>
NET REVENUES.............................    $  14,626           $  18,777                        $  33,403
                                              --------            --------                         --------
COST AND EXPENSES:
  Cost of revenues.......................       44,234              33,626                           77,860
  Research and development...............        5,410              13,375                           18,785
  Sales, marketing, general and
     administrative......................       18,647               5,777            2,565(b)       36,093
                                              --------            --------                         --------
                                                                                      7,847(a)
                                                                                      1,257(c)
     Total operating expenses............       68,291              52,778                          132,738
OPERATING LOSS...........................      (53,665)            (34,001)                         (99,335)
  Other income (expense).................        2,683                (365)                           2,318
  Interest income........................        3,133                 249                            3,382
  Interest expense.......................       (2,309)             (1,053)                          (3,362)
                                              --------            --------                         --------
NET LOSS BEFORE EXTRAORDINARY CREDIT.....    $ (50,158)          $ (35,170)                       $ (96,997)
                                              ========            ========                         ========
LOSS PER COMMON SHARE BEFORE
  EXTRAORDINARY CREDIT...................    $   (0.79)          $   (7.63)                           (0.94)
Number of shares used in computation.....       63,697               4,611                 (d)      103,697
</TABLE>
 
   See notes to unaudited pro forma condensed combined financial statements.
 
                                      F-58
<PAGE>   119
 
                NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
                    FINANCIAL STATEMENTS OF JTS CORPORATION
 
NOTE 1 -- PURCHASE PRICE
 
     The purchase price of the acquisition of JTS by Atari is computed as
follows:
 
<TABLE>
        <S>                                                              <C>
        Warrants and employee stock options............................  $  11,093,000
        Common stock to be issued......................................    100,000,000
        Direct transaction costs.......................................      1,405,048
                                                                          ------------
             TOTAL.....................................................  $ 112,498,048
                                                                          ============
</TABLE>
 
     The JTS common stock, options and warrants were valued using $2.50 per
share which is the representative value of Atari stock at the time the proposed
transaction was announced.
 
     The purchase price is allocated as follows:
 
<TABLE>
        <S>                                                              <C>
        Current assets.................................................  $ 24,696,763
        Equipment and tooling..........................................    20,599,675
        In-process technology..........................................   110,011,856
        Existing technology............................................    23,541,619
        Liabilities assumed............................................   (84,307,614)
        Goodwill.......................................................    17,955,749
                                                                         ------------
             TOTAL.....................................................  $112,498,048
                                                                         ============
</TABLE>
 
     The allocation of the purchase price to the assets acquired in the Moduler
Electronics acquisition is discussed on page F-37. The pro forma amounts for JTS
and Moduler include the operations for JTS and Moduler for the periods indicated
and assume that Moduler was acquired at the beginning of the periods indicated.
 
NOTE 2 -- PRO FORMA ADJUSTMENTS
 
     The following pro forma adjustments have been made to the unaudited pro
forma condensed combined financial statements:
 
     (a) --  Reflects amortization of purchased existing technology on a
             straight-line basis over three years.
 
     (b) --  Reflects amortization of goodwill on a straight-line basis over
             seven years.
 
     (c) -- Reflects depreciation of the step-up of equipment on a straight-line
            basis over three years.
 
     (d) --  Reflects the outstanding common stock of JTS assuming the
             conversion of outstanding preferred stock of JTS excluding the
             impact of stock options and warrants which are antidilutive.
 
     (e) -- Reflects elimination of interest between Atari and JTS.
 
     (f) --  Reflects elimination of nonrecurring gain on sale of a marketable
             security.
 
     No deferred tax adjustments is made as the deferred tax assets, consisting
primarily of net operating loss carryforwards, exceed the deferred tax
liabilities and the excess of the deferred tax assets over the deferred tax
liabilities is offset by a valuation allowance due to the uncertainty
surrounding the realization.
 
                                      F-59
<PAGE>   120
 
                NOTES TO UNAUDITED PRO FORMA CONDENSED COMBINED
              FINANCIAL STATEMENTS OF JTS CORPORATION (CONTINUED)
 
NOTE 3 -- IN-PROCESS RESEARCH AND DEVELOPMENT
 
     The allocation of the purchase price among identifiable intangible assets
was based on an allocation of the fair value of those assets. Such allocation
assigned $110.0 million to purchased in-process research and development. The
$110.0 million was expensed in the third calendar quarter as the technology had
not yet reached technological feasibility and does not have alternative future
uses. The unaudited pro forma condensed combined statements of operations do not
include this one-time charge for purchased in-process technology as it
represents a material nonrecurring charge which resulted from the merger.
 
NOTE 4 -- DEFERRED COMPENSATION
 
     Upon the closing of the merger, JTS recorded a one-time expense charge of
approximately $3.4 million of deferred compensation which was being amortized.
Such expense has not been recorded in the accompanying pro forma financial
statements.
 
                                      F-60
<PAGE>   121
 
- ------------------------------------------------------
- ------------------------------------------------------
 
  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...........................     8
Use of Proceeds........................    17
Dividend Policy........................    17
Capitalization.........................    18
Price Range of Common Stock............    19
Selected Historical Financial Data.....    20
Selected Pro Forma Financial Data......    21
Management's Discussion and Analysis of
  Financial Condition and Results of
  Operations...........................    22
Business...............................    27
Management.............................    38
Certain Transactions...................    45
Principal Stockholders and Selling
  Security Holders.....................    48
Description of Capital Stock...........    53
Shares Eligible for Future Sale........    57
Plan of Distribution...................    58
Legal Matters..........................    58
Experts................................    58
Additional Information.................    59
Index to Consolidated Financial
  Statements...........................   F-1
</TABLE>
 
                            ------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
- ------------------------------------------------------
 
                               56,392,046 SHARES
 
                                JTS CORPORATION
 
                                  COMMON STOCK
                              --------------------
                                   PROSPECTUS
                              --------------------
                                            , 1997
 
- ------------------------------------------------------
- ------------------------------------------------------
<PAGE>   122
 
                                    PART II
 
                     INFORMATION NOT REQUIRED IN PROSPECTUS
 
ITEM 13. OTHER EXPENSES OF ISSUANCE AND DISTRIBUTION.
 
     The following table sets forth all expenses, other than the underwriting
discounts and commissions, payable by the Registrant in connection with the sale
of the shares of Common Stock being registered. All the amounts shown are
estimates except for the registration fee and the AMEX application fee.
 
<TABLE>
        <S>                                                                 <C>
        Registration fee..................................................  $ 16,000
        AMEX application fee..............................................    17,500
        Blue sky qualification fee and expenses...........................         0
        Printing and engraving expenses...................................    50,000
        Legal fees and expenses...........................................    40,000
        Accounting fees and expenses......................................     3,000
        Transfer agent and registrar fees.................................         0
        Miscellaneous.....................................................         0
                                                                             -------
                  Total...................................................  $126,500
                                                                             =======
</TABLE>
 
ITEM 14. INDEMNIFICATION OF DIRECTORS AND OFFICERS
 
     Under Section 145 of the Delaware General Corporation Law, the Registrant
has broad powers to indemnify its directors and officers against liabilities
they may incur in such capacities, including liabilities under Securities Act.
The Registrant's Bylaws provide that the Registrant will indemnify its directors
and executive officers and may indemnify other officers to the fullest extent
permitted by law. Under its Bylaws, indemnified parties are entitled to
indemnification for negligence, gross negligence and otherwise to the fullest
extent permitted by law. The Bylaws also require the Registrant to advance
litigation expenses in the case of stockholder derivative actions or other
actions, against an undertaking by the indemnified party to repay such advances
if it is ultimately determined that the indemnified party is not entitled to
indemnification.
 
     In addition, the Registrant's Certificate of Incorporation provides that,
pursuant to Delaware law, its directors shall not be liable for monetary damages
for breach of the directors' fiduciary duty of care to the Registrant and its
stockholders. This provision in the Certificate of Incorporation does not
eliminate the duty of care, and in appropriate circumstances equitable remedies
such as injunctive or other forms of non-monetary relief will remain available
under Delaware law. In addition, each director is subject to liability for
breach of the director's duty of loyalty to the Registrant for acts or omissions
not in good faith or involving intentional misconduct, for knowing violation of
law, for actions leading to improper personal benefit to the director, and for
payment of dividends or approval of stock repurchases or redemptions that are
unlawful under Delaware law. The provision also does not affect a director's
responsibilities under any other law, such as the federal securities laws or
state or federal environmental laws.
 
     The Registrant has entered into indemnity agreements with each of its
directors and executive officers. Such indemnity agreements contain provisions
that are in some respects broader than the specific indemnification provisions
contained in Delaware law.
 
ITEM 15. RECENT SALES OF UNREGISTERED SECURITIES
 
     Since the Company's incorporation in February 1994, the Company has sold
and issued the following unregistered securities:
 
          (1) In February 1994, the Company issued 1,000 shares of Common Stock
     at a price of $.01 per share for an aggregate price of $10.00 to the Tandon
     Family Partnership, of which Sirjang L. Tandon is the General Partner.
 
                                      II-1
<PAGE>   123
 
          (2) In February 1994, the Company issued 111 shares of Common Stock to
     TEAC Corporation ("TEAC") in exchange for certain assets and licensing
     royalty rights pursuant to a corporate partnering agreement. In February
     1995, the Board of Directors approved a 4350-for-1 Common Stock Split.
 
          (3) From February 1995 to August 1995, the Company issued 17,696,370
     shares of Series A Preferred Stock at a price of $1.00 per share
     convertible into 17,696,370 shares of Common Stock to fifty eight (58)
     accredited investors for cash in the aggregate amount of $17,696,370. All
     of the Company's outstanding shares of Series A Preferred Stock converted
     into Common Stock on a one-for-one basis upon the closing of the Company's
     merger with Atari in July 1996.
 
          (4) In January 1996, the Company made loans to each of David T.
     Mitchell, Kenneth D. Wing, Virginia Walker and David B. Pearce, all of whom
     are current or former executive officers of the Company, in connection with
     the purchase by such individuals of 2,000,000 shares, 300,000 shares,
     250,000 shares and 450,000 shares of Common Stock, respectively, at a
     purchase price of $0.25 per share and for an aggregate offering price of
     $750,000 pursuant to the terms of restricted stock purchase agreements.
 
          (5) In April 1996, the Company acquired JTS Technology in exchange for
     issuing 1,911,673 shares of Series A Preferred Stock and a warrant to
     purchase 750,000 shares of Common Stock at a exercise price of $0.25 per
     share to Lunenberg S.A., an affiliate of Sirjang L. Tandon. Such Warrant
     has been exercised 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 $29,000,000.
 
          (6) On October 31, 1996, the Company issued 15,000 shares of Series B
     Preferred Stock at a purchase price of $1,000.00 per share to Genesee Fund
     Limited-Portfolio B and GFL Advantage Fund Limited for an aggregate
     offering price of $15,000,000. The Series B Preferred Stock is convertible
     into units consisting of Common Stock and Investor Warrants. The Series B
     Preferred Stock, together with any accrued and unpaid dividends, may be
     converted into Common Stock at a conversion price equal to the lower of (i)
     85% of the average lowest trading price for the five days preceding the
     conversion notice date or (ii) 100% of the average closing bid price for
     the five days preceding the Series B Closing. 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 one Investor
     Warrant. The Investor Warrants are exercisable at a purchase price per
     share of the lower of 110% of (i) the arithmetic average of closing prices
     for five consecutive trading days used to compute conversion of shares of
     Series B Preferred Stock in respect of the issuance of the particular
     Investor Warrant and (iii) $3.6125, subject to adjustment. In connection
     with the issuance of Series B Preferred Stock to GFL Advantage Fund Limited
     and Genesee Fund Limited -- Portfolio B, the Company issued 37,500 Finder's
     Warrants to Wharton Capital Corporation in consideration for financial
     consulting services furnished to the Company. See "Description of Capital
     Stock -- Series B Preferred Stock -- Warrants."
 
          (7) On January 22, 1997, the Company issued an aggregate of 25,000
     shares of Series C Preferred Stock at a purchase price of $1,000 per share
     to Nelson Partners, Olympus Securities, Ltd., RGC International Investors,
     LDC and Capital Ventures International for an aggregate offering price of
     $25,000,000. The Series C Preferred Stock, together with any accrued but
     unpaid dividends, may be converted into Common Stock at a conversion price
     equal to the lowest of (i) 85% (subject to adjustment) of the average
     lowest sales price of the Company's Common Stock for the five trading days
     preceding the conversion date, (ii) $3.6125 and (iii) the average lowest
     sale price of the Company's Common Stock for the five trading days
     preceding the date on which this Registration Statement is declared
     effective.
 
     The sale and issuances of securities in the transactions described in
paragraphs (1), (2), (3), (5), (6) and (7) above were deemed to be exempt from
registration under the Securities Act by virtue of Section 4(2) and/or
Regulation D promulgated under the Securities Act. The sale and issuance of
securities in the transactions described in paragraph (4) were deemed to be
exempt from registration under the Securities Act by virtue of Rule 701
promulgated under the Securities Act. Appropriate legends are affixed to the
stock certificates and/or warrants issued in such transactions.
 
                                      II-2
<PAGE>   124
 
ITEM 16. EXHIBITS AND FINANCIAL STATEMENT SCHEDULES
 
     (a) EXHIBITS
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  DESCRIPTION OF DOCUMENT
    -------      -----------------------------------------------------------------------------
    <S>     <C>  <C>
     3.1*   --   Amended and Restated Certificate of Incorporation, as amended
     3.2*   --   Amended and Restated Bylaws of JTS Corporation
     4.1*   --   Form of Specimen Common Stock Certificate of JTS Corporation
     4.2*   --   Registration Rights Agreement, dated February 3, 1995, as amended by and
                 among the holders of Series A Preferred Stock and the Company
     4.3**  --   Certificate of Designations of Series B Preferred Stock, dated November 5,
                 1996
     4.4**  --   Registration Rights Agreement, dated October 31, 1996, by and among the
                 holders of Series B Preferred Stock and the Company
     4.5    --   Certificate of Designations of Series C Preferred Stock, dated January 17,
                 1997
     4.6    --   Registration Rights Agreement, dated January 22, 1997, by and among the
                 holders of Series C Preferred Stock and the Company
     5.1    --   Opinion of Cooley Godward LLP as to legality of securities being registered
    10.1*   --   Amended and Restated 1995 Stock Option Plan and forms of stock option
    10.2*   --   1996 Non-Employee Directors' Plan and form of stock option agreement
    10.3*   --   401(k) Plan, adopted March 15, 1996
    10.4*   --   Form of Indemnity Agreement
    10.5*   --   Employment Contract of Kenneth D. Wing, dated June 15, 1995
    10.6*   --   Consulting Agreement of Roger W. Johnson, dated April 1, 1996
    10.7*   --   Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and
                 David T. Mitchell and related Promissory Note
    10.8*   --   Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and
                 David T. Mitchell and related Promissory Note
    10.9*   --   Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS and
                 Sirjang Lal Tandon and related Promissory Note
    10.10*  --   Restricted Stock Purchase Agreement, dated January 2, 1996, between JTS and
                 Kenneth D. Wing and related Promissory Note
    10.11*  --   Restricted Stock Purchase Agreement, dated January 5, 1996, between JTS and
                 W. Virginia Walker and related Promissory Note
    10.12*  --   Restricted Stock Purchase Agreement dated January 2, 1996, between JTS and
                 David Pearce and related Promissory Note
    10.13*  --   Form of convertible promissory note between JTS and certain principal
                 stockholders of JTS
    10.14*  --   Form of promissory note between JTS and certain principal stockholders of JTS
    10.15*  --   Subordinated Secured Convertible Promissory Note, dated February 13, 1996,
                 and related Security Agreement dated February 13, 1996, between JTS and Atari
    10.16*  --   Stock Purchase Agreement, dated April 4, 1996, between JTS and Lunenburg S.A.
    10.17*  --   Technical Know-How License Agreement, dated June 14, 1996, between JTS and
                 JTS Technology
    10.18*  --   Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust
    10.19*  --   Loan Agreement between JTS Technology as Borrower and The Industrial Credit
                 and Investment Corporation of India Limited as Lenders, dated September 15,
                 1992
    10.20*+ --   Loan Agreement between JTS Technology as Borrower and The Industrial Credit
                 and Investment Corporation of India Limited as Lenders, dated October 11,
                 1994
</TABLE>
 
                                      II-3
<PAGE>   125
 
<TABLE>
<CAPTION>
    EXHIBIT
    NUMBER                                  DESCRIPTION OF DOCUMENT
    -------      -----------------------------------------------------------------------------
    <S>     <C>  <C>
    10.21*+ --   Loan Agreement between JTS Technology as Borrower and The Industrial Credit
                 and Investment Corporation of India Limited as Lenders, dated March 18, 1996
    10.22*  --   Agreed Order Compromising Controversies, dated February 4, 1994, as amended
                 January 26, 1995
    10.23*  --   TEAC Master Agreement, dated February 4, 1994
    10.24*+ --   TEAC License Agreement, dated February 4, 1994, as amended on February 3,
                 1995
    10.25*+ --   Development Agreement, dated June 16, 1994, between JTS and Compaq, as
                 amended on February 3, 1995 and December 5, 1995
    10.26*+ --   Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and Compaq
    10.27*+ --   Technology Transfer and License Agreement, dated February 3, 1995, between
                 JTS and Western Digital
    10.28*+ --   Agreement between JTS and Pont Peripherals Corporation, dated January 31,
                 1995, between JTS and Pont
    10.29*+ --   Business Loan Agreement, Promissory Note and Collateral, Assignment, Patent
                 Mortgage and Security Agreement, dated December 18, 1995, between JTS and
                 Silicon Valley Bank
    10.30*  --   Atari and Security Pacific National Bank Indenture, dated April 29, 1987
    10.31*  --   Federated Group/Security Pacific National Bank Indenture, dated April 15,
                 1985
    10.32*  --   First Supplemental Federated Group/Security Pacific National Bank Indenture,
                 dated September 24, 1987
    10.33*  --   Warrant to Purchase 50,000 shares of JTS Common Stock, dated December 18,
                 1995, issued to Silicon Valley Bank
    10.34*  --   Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated April 4,
                 1996, issued to Lunenburg S.A.
    10.35** --   Agreement for Purchase and Sale of Real Property with Repurchase Option dated
                 September 10, 1996, between JTS and Jack Tramiel
    10.36** --   Series B Preferred Stock Subscription Agreement, dated as of November 5,
                 1996, by and among the holders of Series B Preferred Stock and the Company
    10.37   --   Securities Purchase Agreement, dated as of January 22, 1997, by and among the
                 holders of Series C Preferred Stock and the Company
    21.1*   --   List of Subsidiaries
    23.1    --   Consent of Arthur Andersen LLP
    23.3    --   Consent of Counsel. Reference is made to Exhibit 5.1
    24.1    --   Powers of Attorney. Reference is made to page II-6.
    27.1**  --   Financial Data Schedule
</TABLE>
 
- ---------------
 
 * Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-4 (No. 333-06643), as amended, which became
   effective on July 12, 1996.
 
** Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-17093), as amended, which became
   effective on January 23, 1997.
 
 + Confidential Treatment has previously been granted for portions of this
   Exhibit.
 
                                      II-4
<PAGE>   126
 
     (b) FINANCIAL STATEMENT SCHEDULES
 
     Schedule II: Valuation and Qualifying Accounts
 
     Financial Statement Schedules not listed above have been omitted because
they are not applicable or are not required or the information required to be
set forth therein is included in the consolidated financial statements or notes
thereto.
 
ITEM 17. UNDERTAKINGS
 
     The undersigned registrant hereby undertakes:
 
          (1) To file, during any period in which offers or sales are being
     made, a post-effective amendment to this registration statement:
 
             (i) To include any prospectus required by Section 10(a)(3) of the
        Securities Act of 1933;
 
             (ii) To reflect in the prospectus any facts or events arising after
        the effective date of the registration statement (or the most
        post-effective amendment thereof) which, individually or in the
        aggregate, represent a fundamental change in the information set forth
        in the registration statement. Notwithstanding the foregoing, any
        increase or decrease in volume of securities offered (if the total
        dollar value of securities offered would not exceed that which was
        registered) and any deviation from the low or high and of the estimated
        maximum offering range may be reflected in the form of prospectus filed
        with the Commission pursuant to Rule 424(b) if, in the aggregate, the
        changes in volume and price represent no more than a 20 percent change
        in the maximum aggregate offering price set forth in the "Calculation of
        Registration Fee" table in the effective registration statement.
 
             (iii) To include any material information with respect to the plan
        of distribution not previously disclosed in the registration statement
        or any material change to such information in the registration
        statement;
 
          (2) That, for the purpose of determining any liability under the
     Securities Act, each post-effective amendment that contains a form of
     prospectus shall be deemed to be a new registration statement relating to
     the securities offered therein, and the offering of such securities at that
     time shall be deemed to be the initial bona fide offering thereof; and
 
          (3) To remove from registration by means of a post-effective amendment
     any of the securities being registered which remain unsold at the
     termination of the offering.
 
     Insofar as indemnification for liabilities arising under the Securities Act
may be permitted to directors, officers and controlling persons of the
registrant pursuant to provisions described in Item 15, or otherwise, the
registrant has been advised that in the opinion of the Securities and Exchange
Commission such indemnification is against public policy as expressed in the
Securities Act and is, therefore, unenforceable. In the event that a claim for
indemnification against such liabilities (other than the payment by the
registrant of expenses incurred or paid by a director, officer or controlling
person of the registrant in a successful defense of any action, suit or
proceeding) is asserted by such director, officer or controlling person in
connection with the securities being registered, the registrant will, unless in
the opinion of its counsel the matter has been settled by controlling precedent,
submit to a court of appropriate jurisdiction the question whether such
indemnification by it is against public policy as expressed in the Securities
Act and will be governed by the final adjudication of such issue.
 
                                      II-5
<PAGE>   127
 
                                   SIGNATURES
 
     Pursuant to the requirements of the Securities Act of 1933, as amended, JTS
Corporation has duly caused this Registration Statement to be signed on its
behalf by the undersigned, thereunto duly authorized, in the City of San Jose,
County of Santa Clara, State of California, on the 11th day of February, 1997.
 
                                          JTS Corporation
 
                                          By     /s/  W. VIRGINIA WALKER
 
                                            ------------------------------------
                                                     W. Virginia Walker
                                             Executive Vice President, Finance
                                                             and
                                              Administration, Chief Financial
                                                           Officer
                                                       and Secretary
 
                               POWER OF ATTORNEY
 
     KNOW ALL PERSONS BY THESE PRESENTS, that each person whose signature
appears below constitutes and appoints David T. Mitchell and W. Virginia Walker
and each of them, as his true and lawful attorneys-in-fact and agents, with full
power of substitution and resubstitution for him and in his name, place and
stead, in any and all capacities, to sign any and all amendments (including
post-effective amendments) to this Registration Statement, and to file the same,
with all exhibits thereto, and other documents in connection therewith, with the
Securities and Exchange Commission, granting unto said attorneys-in-fact and
agents, and each of them, full power and authority to do and perform each and
every act and thing requisite and necessary to be done in connection therewith,
as fully to all intents and purposes as he might or could do in person, hereby
ratifying and confirming all that said attorneys-in-fact and agents, or any of
them, or their or his substitutes, may lawfully do or cause to be done by virtue
hereof.
 
     Pursuant to the requirements of the Securities Act of 1933, this
Registration Statement has been signed below by the following persons on behalf
of the Registrant and in the capacities and on the dates indicated.
 
<TABLE>
<CAPTION>
                  SIGNATURE                                TITLE                      DATE
- ---------------------------------------------   ----------------------------   ------------------
<S>                                             <C>                            <C>
 
            /s/ DAVID T. MITCHELL                President, Chief Executive     February 11, 1997
- ---------------------------------------------       Officer and Director
              David T. Mitchell                     (Principal Executive
                                                          Officer)
 
           /s/ W. VIRGINIA WALKER                Executive Vice President,      February 11, 1997
- ---------------------------------------------   Finance and Administration,
             W. Virginia Walker                 Chief Financial Officer and
                                                         Secretary
                                                  (Principal Financial and
                                                    Accounting Officer)
 
           /s/ SIRJANG LAL TANDON                Chairman of the Board and      February 11, 1997
- ---------------------------------------------       Corporate Technical
             Sirjang Lal Tandon                          Strategist
 
               /s/ LIP-BU TAN                             Director              February 11, 1997
- ---------------------------------------------
                 Lip-Bu Tan
 
              /s/ JACK TRAMIEL                            Director              February 11, 1997
- ---------------------------------------------
                Jack Tramiel
 
            /s/ ROGER W. JOHNSON                          Director              February 11, 1997
- ---------------------------------------------
              Roger W. Johnson
 
                                                          Director
- ---------------------------------------------
               Jean D. Deleage
</TABLE>
 
                                      II-6
<PAGE>   128
 
              REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS ON SCHEDULE
 
     We have audited in accordance with generally accepted auditing standards,
the financial statements of JTS Corporation included in this registration
statement, and have issued our report thereon dated April 4, 1996. Our audit was
made for the purpose of forming an opinion on those statements taken as a whole.
The schedule listed in the index above is the responsibility of the Company's
management and is presented for purposes of complying with the Securities and
Exchange Commission's rules and is not part of the basic financial statements.
This schedule has been subjected to the auditing procedures applied in the audit
of the basic financial statements and, in our opinion, fairly states in all
material respects the financial data required to be set forth therein in
relation to the basic financial statements taken as a whole.
 
                                          ARTHUR ANDERSEN LLP
 
San Jose, California
April 4, 1996
 
                                      II-7
<PAGE>   129
 
                               INDEX TO EXHIBITS
 
<TABLE>
<CAPTION>
                                                                                        SEQUENTIAL
EXHIBIT                                                                                    PAGE
 NUMBER                                DESCRIPTION OF DOCUMENT                            NUMBER
- --------        ----------------------------------------------------------------------  ----------
<S>       <C>   <C>                                                                     <C>
 3.1*     --    Amended and Restated Certificate of Incorporation, as amended.........
 3.2*     --    Amended and Restated Bylaws of JTS Corporation........................
 4.1*     --    Form of Specimen Common Stock Certificate of JTS Corporation..........
 4.2*     --    Registration Rights Agreement, dated February 3, 1995, as amended by
                and among the holders of Series A Preferred Stock and the Company.....
 4.3**    --    Certificate of Designations of Series B Preferred Stock, dated
                November 5, 1996......................................................
 4.4**    --    Registration Rights Agreement, dated October 31, 1996, by and among
                the holders of Series B Preferred Stock and the Company...............
 4.5      --    Certificate of Designations of Series C Preferred Stock, dated January
                17, 1997..............................................................
 4.6      --    Registration Rights Agreement, dated January 22, 1997, by and among
                the holders of Series C Preferred Stock and the Company...............
 5.1      --    Opinion of Cooley Godward LLP as to legality of securities being
                registered............................................................
10.1*     --    Amended and Restated 1995 Stock Option Plan and forms of stock option
                agreements............................................................
10.2*     --    1996 Non-Employee Directors' Plan and form of stock option
                agreement.............................................................
10.3*     --    401(k) Plan, adopted March 15, 1996...................................
10.4*     --    Form of Indemnity Agreement...........................................
10.5*     --    Employment Contract of Kenneth D. Wing, dated June 15, 1995...........
10.6*     --    Consulting Agreement of Roger W. Johnson, dated April 1, 1996.........
10.7*     --    Restricted Stock Purchase Agreement, dated January 2, 1996, between
                JTS and David T. Mitchell and related Promissory Note.................
10.8*     --    Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS
                and David T. Mitchell and related Promissory Note.....................
10.9*     --    Restricted Stock Purchase Agreement, dated March 6, 1996, between JTS
                and Sirjang Lal Tandon and related Promissory Note....................
10.10*    --    Restricted Stock Purchase Agreement, dated January 2, 1996, between
                JTS and Kenneth D. Wing and related Promissory Note...................
10.11*    --    Restricted Stock Purchase Agreement, dated January 5, 1996, between
                JTS and W. Virginia Walker and related Promissory Note................
10.12*    --    Restricted Stock Purchase Agreement dated January 2, 1996, between JTS
                and David Pearce and related Promissory Note..........................
10.13*    --    Form of convertible promissory note between JTS and certain principal
                stockholders of JTS...................................................
10.14*    --    Form of promissory note between JTS and certain principal stockholders
                of JTS................................................................
10.15*    --    Subordinated Secured Convertible Promissory Note, dated February 13,
                1996, and related Security Agreement dated February 13, 1996, between
                JTS and Atari.........................................................
10.16*    --    Stock Purchase Agreement, dated April 4, 1996, between JTS and
                Lunenburg S.A. .......................................................
10.17*    --    Technical Know-How License Agreement, dated June 14, 1996, between JTS
                and JTS Technology....................................................
10.18*    --    Lease, dated June 15, 1995, between JTS and Cilker Revocable Trust....
</TABLE>
<PAGE>   130
 
<TABLE>
<CAPTION>
                                                                                        SEQUENTIAL
EXHIBIT                                                                                    PAGE
 NUMBER                                DESCRIPTION OF DOCUMENT                            NUMBER
- --------        ----------------------------------------------------------------------  ----------
<S>       <C>   <C>                                                                     <C>
10.19*    --    Loan Agreement between JTS Technology as Borrower and The Industrial
                Credit and Investment Corporation of India Limited as Lenders, dated
                September 15, 1992....................................................
10.20*+   --    Loan Agreement between JTS Technology as Borrower and The Industrial
                Credit and Investment Corporation of India Limited as Lenders, dated
                October 11, 1994......................................................
10.21*+   --    Loan Agreement between JTS Technology as Borrower and The Industrial
                Credit and Investment Corporation of India Limited as Lenders, dated
                March 18, 1996........................................................
10.22*    --    Agreed Order Compromising Controversies, dated February 4, 1994, as
                amended January 26, 1995..............................................
10.23*    --    TEAC Master Agreement, dated February 4, 1994.........................
10.24*+   --    TEAC License Agreement, dated February 4, 1994, as amended on February
                3, 1995...............................................................
10.25*+   --    Development Agreement, dated June 16, 1994, between JTS and Compaq, as
                amended on February 3, 1995 and December 5, 1995......................
10.26*+   --    Purchase Manufacturing Agreement, dated June 16, 1994, between JTS and
                Compaq................................................................
10.27*+   --    Technology Transfer and License Agreement, dated February 3, 1995,
                between JTS and Western Digital.......................................
10.28*+   --    Agreement between JTS and Pont Peripherals Corporation, dated January
                31, 1995, between JTS and Pont........................................
10.29*+   --    Business Loan Agreement, Promissory Note and Collateral, Assignment,
                Patent Mortgage and Security Agreement, dated December 18, 1995,
                between JTS and Silicon Valley Bank...................................
10.30*    --    Atari and Security Pacific National Bank Indenture, dated April 29,
                1987..................................................................
10.31*    --    Federated Group/Security Pacific National Bank Indenture, dated April
                15, 1985..............................................................
10.32*    --    First Supplemental Federated Group/Security Pacific National Bank
                Indenture, dated September 24, 1987...................................
10.33*    --    Warrant to Purchase 50,000 shares of JTS Common Stock, dated December
                18, 1995, issued to Silicon Valley Bank...............................
10.34*    --    Warrant to Purchase up to 750,000 shares of JTS Common Stock, dated
                April 4, 1996, issued to Lunenburg S.A. ..............................
10.35**   --    Agreement for Purchase and Sale of Real Property with Repurchase
                Option dated September 10, 1996, between JTS and Jack Tramiel.........
10.36**   --    Series B Preferred Stock Subscription Agreement, dated as of November
                5, 1996, by and among the holders of Series B Preferred Stock and the
                Company...............................................................
10.37     --    Securities Purchase Agreement, dated as of January 22, 1997, by and
                among the holders of Series C Preferred Stock and the Company.........
21.1*     --    List of Subsidiaries..................................................
23.1      --    Consent of Arthur Andersen LLP........................................
23.3      --    Consent of Counsel. Reference is made to Exhibit 5.1..................
24.1      --    Powers of Attorney. Reference is made to page II-6. ..................
27.1**    --    Financial Data Schedule...............................................
</TABLE>
<PAGE>   131
 
- ---------------
 
 * Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-4 (No. 333-06643), as amended, which became
   effective on July 12, 1996.
 
** Incorporated by reference to exhibits filed with the Registrant's
   Registration Statement on Form S-1 (No. 333-17093), as amended, which became
   effective on January 22, 1997.
 
 + Confidential Treatment has previously been granted for portions of this
   Exhibit.

<PAGE>   1
                                                                     EXHIBIT 4.5


                    CERTIFICATE OF DESIGNATIONS, PREFERENCES
               AND RIGHTS OF SERIES C CONVERTIBLE PREFERRED STOCK
                                       OF
                                 JTS CORPORATION


         JTS Corporation (the "COMPANY"), a corporation organized and existing
under the General Corporation Law of the State of Delaware, does hereby certify
that, pursuant to authority conferred upon the Board of Directors of the Company
by the Certificate of Incorporation, as amended, of the Company, and pursuant to
Section 151 of the General Corporation Law of the State of Delaware, the Board
of Directors of the Company at a meeting duly held, adopted resolutions (i)
authorizing a series of the Company's previously authorized preferred stock,
$.001 par value per share, and (ii) providing for the designations, preferences
and relative, participating, optional or other rights, and the qualifications,
limitations or restrictions thereof, of twenty-five thousand (25,000) shares of
Series C Convertible Preferred Stock of the Company, as follows:

                  RESOLVED, that the Company is authorized to issue 25,000
         shares of Series C Convertible Preferred Stock (the "SERIES C PREFERRED
         SHARES"), $.001 par value per share, which shall have the following
         powers, designations, preferences and other special rights:

                  (1) Dividends. The Series C Preferred Shares shall not bear
         any dividends.

                  (2) Holder's Conversion of Series C Preferred Shares. A holder
         of Series C Preferred Shares shall have the right, at such holder's
         option, to convert the Series C Preferred Shares into shares of the
         Company's common stock, $.001 par value per share (the "COMMON STOCK"),
         on the following terms and conditions:

                      (a) Conversion Right. At any time or times on or after the
         earlier of (i) the date the Registration Statement (as defined below)
         is declared effective by the United States Securities and Exchange
         Commission (the "SEC") and (ii) eighty (80) days after the initial date
         of issuance of the Series C Preferred Shares (the "SCHEDULED EFFECTIVE
         DATE"), any holder of Series C Preferred Shares shall be entitled to
         convert any


<PAGE>   2
         whole number of Series C Preferred Shares into (x) fully paid and
         nonassessable shares (rounded to the nearest whole share in accordance
         with Section 2(g) below) of Common Stock, at the Conversion Rate (as
         defined below) plus (y) an amount per Series C Preferred Share being
         converted (the"ADDITIONAL AMOUNT") equal to the product of
         (.05)(N/365)(1,000), which Additional Amount may be paid, at the option
         of the Company either (I) in cash or (II) in fully paid and
         nonassessable shares of Common Stock (rounded to the nearest whole
         share in accordance with Section 2(g) below) valued at the Average
         Market Price (as defined below) for such Common Stock for the five (5)
         consecutive trading days immediately preceding the Conversion Date (as
         defined below); provided, however, that in no event shall any holder be
         entitled to convert Series C Preferred Shares in excess of that number
         of Series C Preferred Shares which, upon giving effect to such
         conversion, would cause the aggregate number of shares of Common Stock
         beneficially owned by the holder and its affiliates to exceed 4.9% of
         the outstanding shares of the Common Stock following such conversion.
         For purposes of the foregoing proviso, the aggregate number of shares
         of Common Stock beneficially owned by the holder and its affiliates
         shall include the number of shares of Common Stock issuable upon
         conversion of the Series C Preferred Shares with respect to which the
         determination of such proviso is being made, but shall exclude the
         number of shares of Common Stock which would be issuable upon
         conversion of the remaining, nonconverted Series C Preferred Shares
         beneficially owned by the holder and its affiliates. Except as set
         forth in the preceding sentence, for purposes of this paragraph,
         beneficial ownership shall be calculated in accordance with Section
         13(d) of the Securities Exchange Act of 1934, as amended.

                      (b) Conversion Rate. The number of shares of Common
         Stock issuable upon conversion of each of the Series C Preferred Shares
         pursuant to Section (2)(a)(x) above shall equal the quotient obtained
         by dividing (i) 1,000 by (ii) the Conversion Price (the "CONVERSION
         RATE"). For purposes of this Certificate of Designations, the following
         terms shall have the following meanings:

                          (i)  "CONVERSION PRICE" means, as of any Conversion
         Date (as defined below), the lower of the Fixed Conversion Price and
         the Floating Conversion Price, each in effect as of such date and
         subject to adjustment as provided herein;

                          (ii)  "FIXED CONVERSION PRICE" means the lower of
         (A) $3.6125 and (B) the Average Market Price for the Common Stock for
         the five (5) consecutive trading days immediately preceding the date on
         which the Registration Statement is declared effective by the SEC,
         subject to adjustment as provided herein;

                          (iii) "FLOATING CONVERSION PRICE" means, as of any 
         date of determination, the amount obtained by multiplying the
         Conversion Percentage in effect as of such date by the Average Market
         Price for the Common Stock for the five (5) consecutive trading days
         immediately preceding such date;

                          (iv)  "CONVERSION PERCENTAGE" means eighty-five 
         percent (85%), subject to adjustment as provided herein;


                                       -2-

<PAGE>   3
                          (v)   "AVERAGE MARKET PRICE" means, with respect to 
         any security for any period, that price which shall be computed as the
         arithmetic average of the Lowest Sale Prices (as defined below) for
         such security for each trading day in such period (all as appropriately
         adjusted for any stock dividend, stock split, pro rata below market
         price rights offering or other similar transaction during such period);

                          (vi)  "LOWEST SALE PRICE" means, for any security as 
         of any date, the lowest sale price on The American Stock Exchange, Inc.
         ("AMEX") as reported by Bloomberg Financial Markets ("BLOOMBERG"), or,
         if AMEX is not the principal trading market for such security, the
         lowest sale price of such security on the principal securities exchange
         or trading market where such security is listed or traded as reported
         by Bloomberg, or if the foregoing do not apply, the lowest sale price
         of such security in the over-the-counter market on the electronic
         bulletin board for such security as reported by Bloomberg, or, if no
         sale price is reported for such security by Bloomberg, the average of
         the bid prices of any market makers for such security as reported in
         the "pink sheets" by the National Quotation Bureau, Inc. If the Lowest
         Sale Price cannot be calculated for such security on such date on any
         of the foregoing bases, the Lowest Sale Price of such security on such
         date shall be the fair market value as reasonably determined in good
         faith by the Board of Directors of the Company; and

                          (vii) "N" means the number of days from, but 
         excluding, the date that, in connection with the consummation of the
         initial purchase by the holder of Series C Preferred Shares from the
         Company, the Company first had in its possession funds representing
         full payment for the Series C Preferred Shares for which conversion is
         being elected, through and including the Conversion Date for the Series
         C Preferred Shares for which conversion is being elected.

                      (c) Adjustment to Conversion Price - Registration
         Statement. If the registration statement (the "REGISTRATION STATEMENT")
         covering the resale of the shares of Common Stock issuable upon
         conversion of the Series C Preferred Shares and required to be filed by
         the Company pursuant to the Registration Rights Agreement between the
         Company and the initial holders of the Series C Preferred Shares (THE
         "REGISTRATION RIGHTS AGREEMENT") is not declared effective by the SEC
         on or before the Scheduled Effective Date, or, if after the
         Registration Statement has been declared effective by the SEC, sales
         cannot be made pursuant to the Registration Statement (whether because
         of a failure to keep the Registration Statement effective, to disclose
         such information as is necessary for sales to be made pursuant to the
         Registration Statement, to register sufficient shares of Common Stock
         or otherwise), then, as partial relief for the damages to any holder by
         reason of any such delay in or reduction of its ability to sell the
         underlying shares of Common Stock (which remedy shall not be exclusive
         of any other remedies available at law or in equity), the Conversion
         Percentage and the Fixed Conversion Price shall be adjusted as follows:

                          (i)  Conversion Percentage.  Except as provided in
         Section 3(a) and Section 3(f) of the Registation Rights Agreement, the
         Conversion Percentage in effect at such time shall be reduced by a
         number of percentage points equal to the


                                       -3-

<PAGE>   4
         product of (A) two and one-half (2.5) and (B) the sum of (I) the number
         of months (prorated for partial months) after the Scheduled Effective
         Date and prior to the date that the relevant Registration Statement is
         declared effective by the SEC and (II) the number of months (prorated
         for partial months) that sales cannot be made pursuant to the
         Registration Statement after the Registration Statement has been
         declared effective; provided, however, that the maximum aggregate
         reduction in the Conversion Percentage due to this Section 2(c)(i)
         shall be fifteen (15) percentage points. (For example, if the
         Registration Statement becomes effective one and one-half (1 1/2)
         months after the Scheduled Effective Date, the Conversion Percentage
         would be eighty-one and one-fourth percent (81.25%) until any
         subsequent adjustment; if thereafter sales could not be made pursuant
         to the Registration Statement for a period of two (2) additional
         months, the Conversion Percentage would then be seventy-six and
         one-fourth percent (76.25%)); and

                          (ii)  Fixed Conversion Price.  The Fixed Conversion 
         Price in effect at such time shall be reduced by an amount equal to the
         product of (A) nine-hundred and three ten-thousandths (.0903) and (B)
         the sum of (I) the number of months (prorated for partial months) after
         the Scheduled Effective Date and prior to the date that the
         Registration Statement is declared effective by the SEC and (II) the
         number of months (prorated for partial months) that sales cannot be
         made pursuant to the Registration Statement after the Registration
         Statement has been declared effective; provided, however, that the
         maximum aggregate reduction in the Fixed Conversion Price pursuant to
         this section 2(c)(ii) shall be an amount equal to 15% of the Fixed
         Conversion Price in effect at such time. (For example, assuming the
         Fixed Conversion Price is $3.6125, if the Registration Statement
         becomes effective one and one-half (1 1/2) months after the Scheduled
         Effective Date, the Fixed Conversion Price would be $3.4771 until any
         subsequent adjustment; if thereafter sales could not be made pursuant
         to the Registration Statement for a period of two (2) additional
         months, the Fixed Conversion Price would then be $3.2965).

                      (d) Adjustment to Conversion Price -- Dilution and
         Other Events. In order to prevent dilution of the rights granted under
         this Certificate of Designations, the Conversion Price will be subject
         to adjustment from time to time as provided in this Section 2(d).

                          (i)  Adjustment of Fixed Conversion Price upon 
         Subdivision or Combination of Common Stock. If the Company at any time
         subdivides (by any stock split, stock dividend, recapitalization, pro
         rata below market price rights offering or otherwise) one or more
         classes of its outstanding shares of Common Stock into a greater number
         of shares, the Fixed Conversion Price in effect immediately prior to
         such subdivision will be proportionately reduced. If the Company at any
         time combines (by combination, reverse stock split or otherwise) one or
         more classes of its outstanding shares of Common Stock into a smaller
         number of shares, the Fixed Conversion Price in effect immediately
         prior to such combination will be proportionately increased.

                          (ii)  Reorganization, Reclassification, Consolidation,
         Merger or Sale. Any recapitalization, reorganization, reclassification,
         consolidation, merger, sale


                                       -4-

<PAGE>   5
         of all or substantially all of the Company's assets to another Person
         (as defined below) or other transaction which is effected in such a way
         that holders of Common Stock are entitled to receive (either directly
         or upon subsequent liquidation) stock, securities or assets with
         respect to or in exchange for Common Stock is referred to herein as
         "ORGANIC CHANGE." Prior to the consummation of any Organic Change, the
         Company will make appropriate provision (in form and substance
         satisfactory to the holders of a majority of the Series C Preferred
         Shares then outstanding) to insure that each of the holders of the
         Series C Preferred Shares will thereafter have the right to acquire and
         receive in lieu of or addition to (as the case may be) the shares of
         Common Stock immediately theretofore acquirable and receivable upon the
         conversion of such holder's Series C Preferred Shares, such shares of
         stock, securities or assets as may be issued or payable with respect to
         or in exchange for the number of shares of Common Stock immediately
         theretofore acquirable and receivable upon the conversion of such
         holder's Series C Preferred Shares had such Organic Change not taken
         place. In any such case, the Company will make appropriate provision
         (in form and substance satisfactory to the holders of a majority of the
         Series C Preferred Shares then outstanding) with respect to such
         holders' rights and interests to insure that the provisions of this
         Section 2(d) and Section 2(e) below will thereafter be applicable to
         the Series C Preferred Shares (including, in the case of any such
         consolidation, merger or sale in which the successor entity or
         purchasing entity is other than the Company, an immediate adjustment of
         the Fixed Conversion Price to the value for the Common Stock reflected
         by the terms of such consolidation, merger or sale, if the value so
         reflected is less than the Fixed Conversion Price in effect immediately
         prior to such consolidation, merger or sale). The Company will not
         effect any such consolidation, merger or sale, unless prior to the
         consummation thereof, the successor entity (if other than the Company)
         resulting from consolidation or merger or the entity purchasing such
         assets assumes, by written instrument (in form and substance
         satisfactory to the holders of a majority of the Series C Preferred
         Shares then outstanding), the obligation to deliver to each holder of
         Series C Preferred Shares such shares of stock, securities or assets
         as, in accordance with the foregoing provisions, such holder may be
         entitled to acquire. For purposes of this Agreement, "PERSON" shall
         mean an individual, a limited liability company, a partnership, a joint
         venture, a corporation, a trust, an unincorporated organization and a
         government or any department or agency thereof.

                          (iii)  Notices.

                                (A)   Immediately upon any adjustment of the
         Fixed Conversion Price, the Company will give written notice thereof to
         each holder of Series C Preferred Shares, setting forth in reasonable
         detail and certifying the calculation of such adjustment.

                                (B)   The Company will give written notice to
         each holder of Series C Preferred Shares at least twenty (20) days
         prior to the date on which the Company closes its books or takes a
         record (I) with respect to any dividend or distribution upon the Common
         Stock, (II) with respect to any pro rata subscription offer


                                       -5-

<PAGE>   6
         to holders of Common Stock or (III) for determining rights to vote with
         respect to any Organic Change, dissolution or liquidation.

                                 (C)   The Company will also give written notice
         to each holder of Series C Preferred Shares at least twenty (20) days
         prior to the date on which any Organic Change, dissolution or
         liquidation will take place.

                      (e) Purchase Rights. In addition to any adjustments of the
         Conversion Price pursuant to Section 2(d) above, if at any time the
         Company grants, issues or sells any rights or options to subscribe for
         or to purchase Common Stock, any stock or other securities convertible
         into or exchangeable for Common Stock or any rights to purchase stock,
         warrants, securities or other property, in each case, pro rata to the
         record holders of any class of Common Stock (the "PURCHASE RIGHTS"),
         then the holders of Series C Preferred Shares will be entitled to
         acquire, upon the terms applicable to such Purchase Rights, the
         aggregate Purchase Rights which such holder could have acquired if such
         holder had held the number of shares of Common Stock acquirable upon
         complete conversion of the Series C Preferred Shares immediately before
         the date on which a record is taken for the grant, issuance or sale of
         such Purchase Rights, or, if no such record is taken, the date as of
         which the record holders of Common Stock are to be determined for the
         grant, issue or sale of such Purchase Rights.

                      (f) Mechanics of Conversion.  Subject to the Company's
         inability to fully satisfy its obligations under a Conversion Notice
         (as defined below) as provided for in Section 5 below:

                          (i)  Holder's Delivery Requirements.  To convert
         Series C Preferred Shares into full shares of Common Stock on any date
         (the "CONVERSION DATE"), the holder thereof shall (A) deliver or
         transmit by facsimile, for receipt on or prior to 11:59 p.m., Pacific
         Standard Time on such date, a copy of a fully executed notice of
         conversion in the form attached hereto as Exhibit I (the "CONVERSION
         NOTICE"), to the Company or its designated transfer agent (the
         "TRANSFER AGENT"), and (B) surrender to a common carrier for delivery
         to the Company or the Transfer Agent as soon as practicable following
         such date, the original certificates representing the Series C
         Preferred Shares being converted (or an indemnification undertaking
         with respect to such shares in the case of their loss, theft or
         destruction) (the "PREFERRED STOCK CERTIFICATES") and the originally
         executed Conversion Notice.

                          (ii) Company's Response.  Upon receipt by the Company
         of a facsimile copy of a Conversion Notice, the Company shall
         immediately send, via facsimile, a confirmation of receipt of such
         Conversion Notice to such holder. Upon receipt by the Company or the
         Transfer Agent of the Preferred Stock Certificates to be converted
         pursuant to a Conversion Notice, together with the originally executed
         Conversion Notice, the Company or the Transfer Agent (as applicable)
         shall, on the next business day following the date of receipt (or the
         second business day following the date of receipt if received after
         11:00 a.m. local time of the Company or Transfer Agent, as applicable),
         (A) (I) issue and surrender to a common carrier for overnight delivery
         to the


                                       -6-

<PAGE>   7
         address as specified in the Conversion Notice, a certificate,
         registered in the name of the holder or its designee, for the number of
         shares of Common Stock to which the holder shall be entitled, including
         the number of shares of Common Stock constituting the Additional Amount
         if the Company elects to pay the Additional Amount in Common Stock or
         (II) credit such aggregate number of shares of Common Stock to which
         the holder shall be entitled to the holder's or its designee's balance
         account with the Depository Trust Corporation, and (B) issue and
         surrender to a common carrier for overnight delivery to the address as
         specified in the Conversion Notice, a check drawn on an account of the
         Company and payable to the order of the holder or its designee in an
         amount equal to the Additional Amount, if the Company elects to pay the
         Additional Amount in cash.

                          (iii) Dispute Resolution.  In the case of a dispute as
         to the determination of the Lowest Sale Price or the arithmetic
         calculation of the Conversion Rate or the Additional Amount, the
         Company shall promptly issue to the holder the number of shares of
         Common Stock and cash, if applicable, that is not disputed and shall
         submit the disputed determinations or arithmetic calculations to the
         holder via facsimile within one (1) day of receipt of such holder's
         Conversion Notice. If such holder and the Company are unable to agree
         upon the determination of the Lowest Sale Price or arithmetic
         calculation of the Conversion Rate or the Additional Amount within one
         (1) day of such disputed determination or arithmetic calculation being
         submitted to the holder, then the Company shall immediately submit via
         facsimile (A) the disputed determination of the Lowest Sale Price to an
         independent, reputable investment bank or (B) the disputed arithmetic
         calculation of the Conversion Rate or the Additional Amount to its
         independent, outside accountant. The Company shall cause the investment
         bank or the accountant, as the case may be, to perform the
         determinations or calculations and notify the Company and the holder of
         the results no later than forty-eight (48) hours from the time it
         receives the disputed determinations or calculations. Such investment
         bank's or accountant's determination or calculation, as the case may
         be, shall be binding upon all parties absent manifest error.

                          (iv)  Record Holder.  The person or persons entitled
         to receive the shares of Common Stock issuable upon a conversion of
         Series C Preferred Shares shall be treated for all purposes as the
         record holder or holders of such shares of Common Stock on the
         Conversion Date.

                          (v)   Company's Failure to Timely Convert.  If the
         Company shall fail to issue to a holder on a timely basis as described
         in this Section 2(f), a certificate for the number of shares of Common
         Stock to which such holder is entitled upon such holder's conversion of
         Series C Preferred Shares, including shares of Common Stock which
         constitute the Additional Amount, if the Company elects to pay the
         Additional Amount in Common Stock, in addition to all other available
         remedies which such holder may pursue, the Company shall pay damages to
         such holder on each date such conversion is not timely effected in an
         amount equal to 5% of the product of (A) the number of shares of Common
         Stock not issued to the holder on a timely basis and to which such
         holder is entitled and (B) the Closing Price (as defined below) of the


                                       -7-

<PAGE>   8
         Common Stock on the last possible date which the Company could have
         issued such Common Stock to such holder without violating this Section
         2(f). If the Company elects to pay the Additional Amount in cash, and
         fails to pay such Additional Amount on a timely basis as described in
         Section 2(f)(ii) above, such unpaid amount shall bear interest at the
         rate of 2.5% per month until paid in full.

                      (g) Fractional Shares. The Company shall not issue  any 
         fraction of a share of Common Stock upon any conversion. All shares of
         Common Stock (including fractions thereof) issuable upon conversion of
         more than one Series C Preferred Share by a holder thereof (including
         shares of Common Stock issuable in connection with the payment of an
         Additional Amount, if the Company elects to pay such Additional Amount
         in Common Stock) shall be aggregated for purposes of determining
         whether the conversion would result in the issuance of a fraction of a
         share of Common Stock. If, after the aforementioned aggregation, the
         issuance would result in the issuance of a fraction of a share of
         Common Stock, the Company shall round such fraction of a share of
         Common Stock up or down to the nearest whole share.

                      (h) Taxes. The Company shall pay any and all taxes  which 
         may be imposed upon it with respect to the issuance and delivery of
         Common Stock upon the conversion of the Series C Preferred Shares.

                  (3) Redemption at Option of Holders.

                      (a) Redemption Option Upon Major Transaction. In
         addition to all other rights of the holders of Series C Preferred
         Shares contained herein, after a Major Transaction (as defined below),
         the holders of Series C Preferred Shares shall have the right, at the
         option of the holders of at least two-thirds (2/3) of the Series C
         Preferred Shares then outstanding, to require the Company to redeem all
         of the Series C Preferred Shares then outstanding in exchange for
         consideration (the "REDEMPTION CONSIDERATION") per Series C Preferred
         Share equal to the greater of (i) the number of shares of stock or
         securities or cash or property of the Company, or of the entity
         resulting from such consolidation, merger or tender or exchange offer
         (the "MAJOR TRANSACTION CONSIDERATION"), to which a holder of the
         number of shares of Common Stock delivered upon conversion of such
         Series C Preferred Share would have been entitled upon such Major
         Transaction (x) had the holder of such Series C Preferred Share
         exercised its right of conversion on the date of the public
         announcement of such Major Transaction and (y) had such Common Stock
         been issued and outstanding and had such holder been the holder of
         record of such Common Stock at the time of such Major Transaction and
         (ii) an amount of Major Transaction Consideration to which a holder of
         the number of shares of Common Stock equal to (A) the product of 1.1765
         and the Liquidation Value of such Series C Preferred Share, divided by
         (B) the Lowest Sale Price of the Common Stock on the date prior to the
         consummation of the Major Transaction would have been entitled upon
         such Major Transaction had such Common Stock been issued and
         outstanding and had such holder been the holder of record of such
         Common Stock at the time of such Major Transaction, and in either case
         the Company shall make


                                       -8-

<PAGE>   9



         lawful provision therefor as a part of such consolidation, merger or
         tender or exchange offer.

                      (b) Redemption Option Upon Triggering Event. In addition
         to all other rights of the holders of Series C Preferred Shares
         contained herein, after a Triggering Event (as defined below), the
         holders of Series C Preferred Shares shall have the right, at the
         option of the holders of at least two-thirds (2/3) of the Series C
         Preferred Shares then outstanding, to require the Company to redeem all
         of the Series C Preferred Shares then outstanding at a price per Series
         C Preferred Share in cash (the "OPTIONAL REDEMPTION PRICE") equal to
         the greater of (i) 117.65% of the Liquidation Value of such share and
         (ii) the price calculated in accordance with the Redemption Rate
         calculated as of the date immediately preceding such Triggering Event
         on which the exchange or market on which the Common Stock is traded is
         open.

                      (c) "Redemption Rate". The "REDEMPTION RATE" shall, as of 
         any date of determination, be equal to the sum of (i) the product
         obtained by multiplying (A) the Conversion Rate in effect as of such
         date as calculated pursuant to Section 2(b) by (B) the Closing Price of
         the Common Stock on such date, and (ii) an amount equal to the product
         of (.05)(N/365)(1,000).

                      (d) "Closing Price". "CLOSING PRICE" means, for any
         security as of any date, the last closing price on AMEX as reported by
         Bloomberg, or, if AMEX is not the principal trading market for such
         security, the last closing price of such security on the principal
         securities exchange or trading market where such security is listed or
         traded as reported by Bloomberg, or if the foregoing do not apply, the
         closing price of such security in the over-the-counter market on the
         electronic bulletin board for such security as reported by Bloomberg,
         or, if no closing price is reported for such security by Bloomberg, the
         average of the ask prices of any market makers for such security as
         reported in the "pink sheets" by the National Quotation Bureau, Inc. If
         the Closing Price cannot be calculated for such security on such date
         on any of the foregoing bases, the Closing Price of such security on
         such date shall be the fair market value as reasonably determined in
         good faith by the Board of Directors of the Company (all as
         appropriately adjusted for any stock dividend, stock, split or other
         similar transaction during such period).

                      (e) "Major Transaction".  A "MAJOR TRANSACTION" shall
         be deemed to have occurred at such time as any of the following events:

                          (i)   the consolidation or merger of the Company with
         or into another Person (other than pursuant to a migratory merger
         effected solely for the purpose of changing the jurisdiction of
         incorporation of the Company);

                          (ii)  the sale or transfer of substantially all of the
         Company's assets; or



                                       -9-

<PAGE>   10



                          (iii) a purchase, tender or exchange offer made to and
         accepted by the holders of more than 10% of the outstanding shares of
         Common Stock.

                      (f) "Triggering Event".  A "TRIGGERING EVENT" shall be
         deemed to have occurred at such time as any of the following events:

                          (i)   the failure of the Registration Statement to be
         declared effective by the SEC on or prior to the date that is sixty
         (60) days after the Scheduled Effective Date;

                          (ii)  either (A) the failure of the Registration 
         Statement to be effective or to cover the resale of all of the shares
         of Common Stock issued or issuable upon conversion of the Series C
         Preferred Shares or (B) notice from the Company that Common Stock
         issued or issuable upon conversion of the Shares C Preferred Shares
         cannot be sold under the Registration Statement, for any period of
         sixty (60) consecutive days after the date that is sixty (60) days
         after the Scheduled Effective Date (provided that for purposes of
         determining the Closing Price under Section 3(c) above, the Triggering
         Event shall be deemed to have occurred on the first day of such 60-day
         period);

                          (iii) David T. Mitchell ceases to be a director or 
         officer of the Company prior to August 1, 1997 for any reason other
         than death or "disability"; provided that for purposes of this
         Certificate of Designations, David T. Mitchell shall be deemed to have
         a "disability" if he is unable to perform, by reason of physical or
         mental incapacity, his duties or obligations as a director or officer
         of the Company for any thirty (30) consecutive day period;

                          (iv)  the failure of the Common Stock to be listed on 
         AMEX, the Nasdaq National Market or The New York Stock Exchange, Inc.
         for a period of seven (7) consecutive days (provided that for purposes
         of determining the Closing Price under Section 3(c) above, the
         Triggering Event shall be deemed to have occurred on the first day of
         such seven-day period and provided further that such failure shall not
         constitute a Triggering Event if caused by holders of Series C
         Preferred Shares pursuant to Section 3(i) below); or

                          (v)   the Company's notice to any holder of Series C
         Preferred Shares, including by way of public announcement, at any time,
         of its intention not to comply with proper requests for conversion of
         any Series C Preferred Shares into shares of Common Stock, including
         due to any of the reasons set forth in Section 5(a) below.

                      (g) Mechanics of Redemption at Option of Buyer Upon
         Major Transaction. No sooner than fifteen (15) days nor later than ten
         (10) days prior to the consummation of a Major Transaction, but not
         prior to the public announcement of such Major Transaction, the Company
         shall deliver written notice thereof via facsimile and overnight
         courier ("NOTICE OF MAJOR TRANSACTION") to each holder of Series C
         Preferred Shares. At any time after receipt of a Notice of Major
         Transaction, the holders of at


                                      -10-

<PAGE>   11
         least two-thirds (2/3) of the Series C Preferred Shares then
         outstanding may require the Company to redeem all of the holder's
         Series C Preferred Shares then outstanding by delivering written notice
         thereof via facsimile and overnight courier ("NOTICE OF REDEMPTION AT
         OPTION OF BUYER UPON MAJOR TRANSACTION") to the Company, which Notice
         of Redemption at Option of Buyer Upon Major Transaction shall indicate
         (i) the number of Series C Preferred Shares that such holders are
         voting in favor of redemption and (ii) the applicable Redemption
         Consideration, as calculated pursuant to Section 3(a) above.

                      (h) Mechanics of Redemption at Option of Buyer Upon
         Triggering Event. Within one (1) day after the occurrence of a
         Triggering Event, the Company shall deliver written notice thereof via
         facsimile and overnight courier ("NOTICE OF TRIGGERING EVENT") to each
         holder of Series C Preferred Shares. At any time after receipt of a
         Notice of Triggering Event, the holders of at least two-thirds (2/3) of
         the Series C Preferred Shares then outstanding may require the Company
         to redeem all of the Series C Preferred Shares by delivering written
         notice thereof via facsimile and overnight courier ("NOTICE OF
         REDEMPTION AT OPTION OF BUYER UPON TRIGGERING EVENT") to the Company,
         which Notice of Redemption at Option of Buyer Upon Triggering Event
         shall indicate (i) the number of Series C Preferred Shares that such
         holders are voting in favor of redemption and (ii) the applicable
         Optional Redemption Price, as calculated pursuant to Section 3(b)
         above.

                      (i) Payment of Redemption Price. Upon the Company's
         receipt of a Notice(s) of Redemption at Option of Buyer Upon Major
         Transaction or a Notice(s) of Redemption at Option of Buyer Upon
         Triggering Event, as the case may be, from the holders of at least
         two-thirds (2/3) of the Series C Preferred Shares then outstanding, the
         Company shall immediately notify each holder by facsimile of the
         Company's receipt of such requisite notices necessary to affect a
         redemption and each holder of Series C Preferred Shares shall
         thereafter promptly send such holder's Preferred Stock Certificates to
         be redeemed to the Company or its Transfer Agent. The Company shall
         deliver the applicable Redemption Consideration or Optional Redemption
         Price, as the case may be, to such holder within thirty (30) days after
         the Company's receipt of the requisite notices required to affect a
         redemption; provided that a holder's Preferred Stock Certificates shall
         have been so delivered to the Company or its Transfer Agent; provided
         further that if the Company is unable to redeem all of the Series C
         Preferred Shares, the Company shall redeem an amount from each holder
         of Series C Preferred Shares equal to such holder's pro-rata amount
         (based on the number of Series C Preferred Shares held by such holder
         relative to the number of Series C Preferred Shares outstanding) of all
         Series C Preferred Shares being redeemed. If the Company shall fail to
         redeem all of the Series C Preferred Shares submitted for redemption
         (other than pursuant to a dispute as to the determination of the
         Closing Price or the arithmetic calculation of the Redemption Rate),
         the applicable Redemption Consideration or Optional Redemption Price
         payable in respect of such unredeemed Series C Preferred Shares shall
         bear interest at the rate of 2.5% per month (prorated for partial
         months) until paid in full. Until the Company pays such unpaid
         applicable Redemption Consideration or Optional Redemption Price in
         full to each holder, holders of at least two-thirds (2/3) of the Series
         C Preferred Shares then


                                      -11-

<PAGE>   12
         outstanding, including shares of Series C Preferred Shares submitted
         for redemption pursuant to this Section 3 and for which the applicable
         Redemption Consideration or Optional Redemption Price has not been
         paid, shall have the option (the "VOID OPTIONAL REDEMPTION OPTION") to,
         in lieu of redemption, require the Company to promptly return to each
         holder all of the Series C Preferred Shares that were submitted for
         redemption by such holder under this Section 3 and for which the
         applicable Redemption Consideration or Optional Redemption Price has
         not been paid, by sending written notice thereof to the Company via
         facsimile (the "VOID OPTIONAL REDEMPTION NOTICE"). Upon the Company's
         receipt of such Void Optional Redemption Notice(s) and prior to payment
         of the full applicable Redemption Consideration or Optional Redemption
         Price to each holder, (i) the Notice(s) of Redemption at Option of
         Buyer Upon Triggering Event or the Notice(s) of Redemption at Option of
         Buyer Upon Major Transaction, as the case may be, shall be null and
         void with respect to those Series C Preferred Shares submitted for
         redemption and for which the applicable Redemption Consideration or
         Optional Redemption Price has not been paid, (ii) the Company shall
         immediately return any Series C Preferred Shares submitted to the
         Company by each holder for redemption under this Section 3(i) and for
         which the applicable Redemption Consideration or Optional Redemption
         Price has not been paid, (iii) the Fixed Conversion Price of such
         returned Series C Preferred Shares shall be adjusted to the lesser of
         (A) the Fixed Conversion Price as in effect on the date on which the
         Void Optional Redemption Notice(s) is delivered to the Company and (B)
         the lowest Closing Price during the period beginning on the date on
         which the Notice(s) of Redemption of Option of Buyer Upon Major
         Transaction or the Notice(s) of Redemption at Option of Buyer Upon
         Triggering event, as the case may be, is delivered to the Company and
         ending on the date on which the Void Optional Redemption Notice(s) is
         delivered to the Company; provided that no adjustment shall be made if
         such adjustment would result in an increase of the Fixed Conversion
         Price then in effect, and (iv) the Conversion Percentage in effect at
         such time shall be reduced by a number of percentage points equal to
         the product of (A) two and one-half (2.5) and (B) the number of months
         (prorated for partial months) in the period beginning on the date on
         which the Notice(s) of Redemption at Option of Buyer Upon Major
         Transaction or the Notice(s) of Redemption at Option of Buyer Upon
         Triggering Event, as the case may be, is delivered to the Company and
         ending on the date on which the Void Optional Redemption Notice(s) is
         delivered to the Company. In addition, if a redemption voided pursuant
         to this Section 3(i) was caused by a Triggering Event involving the
         Company's inability to issue Conversion Shares because of the Amex Cap,
         and if so directed by the holders of at least two-thirds (2/3) of the
         Series C Preferred Shares then outstanding, including shares of Series
         C Preferred Shares submitted for redemption pursuant to this Section 3
         with respect to which the applicable Optional Redemption Price has not
         been paid, in a Void Mandatory Redemption Notice, the Company shall
         immediately delist the Common Stock from AMEX and have the Common
         Stock, at such holders' option, listed on The Nasdaq SmallCap Market or
         traded on the electronic bulletin board or the "pink sheets".
         Notwithstanding the foregoing, in the event of a dispute as to the
         determination of the Closing Price or Major Transaction Consideration
         or the arithmetic calculation of the Redemption Rate, such dispute
         shall be resolved pursuant to Section 2(f)(iii) above with the term
         "Closing Price" or "Major Transaction Consideration" being substituted
         for the term "Lowest Sale Price"


                                      -12-

<PAGE>   13
         and the term "Redemption Rate" being substituted for the term
         "Conversion Rate". Payments provided for in this Section 3 shall have
         priority to payments to other stockholders in connection with a Major
         Transaction.

                  (4) Company's Right to Redeem at Its Election. Subject to
         Section 4(d) below, at any time, the Company shall have the right, at
         its option, to redeem ("REDEMPTION AT THE COMPANY'S ELECTION"), from
         time to time, any or all of the Series C Preferred Shares; provided
         that (i) the Notice of Redemption at the Company's Election (as defined
         below) is delivered on a date on which the Closing Price of the Common
         Stock is greater than $7.23 and (ii) the Company shall be entitled to
         redeem under this Section 4, if and only if, it redeems Series C
         Preferred Shares having an aggregate Liquidation Value of at least Five
         Million Dollars ($5,000,000). If the Company elects to redeem some, but
         not all, of the Series C Preferred Shares, the Company shall redeem an
         amount from each holder of Series C Preferred Shares equal to such
         holder's pro-rata amount (based on the number of Series C Preferred
         Shares held by such holder relative to the number of Series C Preferred
         Shares outstanding) of all Series C Preferred Shares being redeemed.

                      (a) Redemption Price at the Company's Election. The
         "REDEMPTION PRICE AT THE COMPANY'S ELECTION" shall be an amount per
         Series C Preferred Share equal to the greater of (i) the price
         calculated in accordance with the Redemption Rate as of the date of the
         Notice of Redemption at the Company's Election and (ii) 117.65% of the
         Liquidation Value of such Series C Preferred Share.

                      (b) Mechanics of Redemption at the Company's  Election. 
         The Company shall effect each such redemption no sooner than (30) days
         after delivering written notice thereof via facsimile and overnight
         courier ("NOTICE OF REDEMPTION AT THE COMPANY'S ELECTION") to each (i)
         holder of the Series C Preferred Shares and (ii) the Transfer Agent.
         Such Notice of Redemption at the Company's Election shall indicate (A)
         the number of shares of Series C Preferred Shares that have been
         selected for redemption, (B) the date that such redemption is to become
         effective (the "DATE OF REDEMPTION AT THE COMPANY'S ELECTION") and (C)
         the applicable Redemption Price at the Company's Election.
         Notwithstanding the above, any holder may convert into Common Stock
         pursuant to Section (2)(a) above, prior to the close of business on the
         day prior to the Date of Redemption at the Company's Election, any
         Series C Preferred Shares that such holder is otherwise entitled to
         convert, including Series C Preferred Shares that have been selected
         for redemption at the Company's election pursuant to this Section 4.

                      (c) Payment of Redemption Price. Each holder submitting 
         Series C Preferred Shares being redeemed under this Section 4 shall
         send such holder's Preferred Stock Certificates so redeemed to the
         Company or its Transfer Agent within five (5) business days after the
         Date of Redemption at the Company's Election, and the Company shall pay
         the applicable Redemption Price at the Company's Election to that
         holder in cash within five (5) business days after such holder's
         Preferred Stock Certificates are delivered to the Company or its
         Transfer Agent. If the Company shall fail to pay the


                                      -13-

<PAGE>   14
         applicable Redemption Price at the Company's Election to such holder on
         a timely basis as described in this Section 4(c), such unpaid amount
         shall bear interest at the rate of 2.5% per month until paid in full.
         Notwithstanding the foregoing, if the Company fails to pay the
         applicable Redemption Price at the Company's Election to a holder
         within the time period described in this Section 4 due to a dispute as
         to the determination of the Closing Price or the arithmetic calculation
         of the Redemption Rate, such dispute shall be resolved pursuant to
         Section 2(f)(iii) above with the term "Closing Price" being substituted
         for the term "Lowest Sale Price" and the term "Redemption Rate" being
         substituted for the term "Conversion Rate."

                      (d) Company Must Have Immediately Available Funds or
         Credit Facilities. The Company shall not be entitled to send any Notice
         of Redemption at the Company's Election pursuant to Section 4(b) above
         and begin the redemption procedure under this Section 4, unless it has:

                          (i)   the full amount of the Redemption Price at the 
         Company's Election in cash, available in a demand or other immediately
         available account in a bank or similar financial institution;

                          (ii)  credit facilities, with a bank or similar 
         financial institutions that are immediately available and unrestricted
         for use in redeeming the Series C Preferred Shares, in the full amount
         of the Redemption Price at the Company's Election;

                          (iii) a written agreement with a standby underwriter 
         or qualified buyer ready, willing and able to purchase from the Company
         a sufficient number of shares of stock to provide proceeds necessary to
         redeem any stock that is not converted prior to a Redemption at the
         Company's Election; or

                          (iv)  a combination of the items set forth in the 
         preceding clauses (i), (ii) and (iii), aggregating the full amount of
         the Redemption Price at the Company's Election.

                  (5) Inability to Fully Convert.

                      (a) Holder's Option if Company Cannot Fully Convert. If, 
         upon the Company's receipt of a Conversion Notice, the Company can not
         issue shares of Common Stock registered for resale under the
         Registration Statement for any reason, including, without limitation,
         because the Company (x) does not have a sufficient number of shares of
         Common Stock authorized and available, (y) is otherwise prohibited by
         applicable law or by the rules or regulations of any stock exchange,
         interdealer quotation system or other self-regulatory organization with
         jurisdiction over the Company or its Securities, including without
         limitation the AMEX Cap (as defined below), from issuing all of the
         Common Stock which is to be issued to a holder of Series C Preferred
         Shares pursuant to a Conversion Notice or (z) fails to have a
         sufficient number of shares of Common Stock registered for resale under
         the Registration Statement, then the Company shall issue as many shares
         of Common Stock as it is able to issue in accordance with


                                      -14-

<PAGE>   15
         such holder's Conversion Notice and pursuant to Section 2(f) above and,
         with respect to the unconverted Series C Preferred Shares, the holder,
         solely at such holder's option, can elect to:

                          (i)   require the Company to redeem from such holder 
         those Series C Preferred Shares for which the Company is unable to
         issue Common Stock in accordance with such holder's Conversion Notice
         ("MANDATORY REDEMPTION") at a price per Series C Preferred Share (the
         "MANDATORY REDEMPTION PRICE") equal to the greater of (x) 117.65% of
         the Liquidation Value of such share and (y) the Redemption Rate as of
         such Conversion Date;

                          (ii)  if the Company's inability to fully convert 
         Series C Preferred Shares is pursuant to Section 5(a)(z) above, require
         the Company to issue restricted shares of Common Stock in accordance
         with such holder's Conversion Notice and pursuant to Section 2(f)
         above;

                          (iii) void its Conversion Notice and retain or have 
         returned, as the case may be, the nonconverted Series C Preferred
         Shares that were to be converted pursuant to such holder's Conversion
         Notice; or

                          (iv)  if the Company's inability to fully convert 
         Series C Preferred Shares is pursuant to the Amex Cap described in
         Section 5(a)(y) above, require the Company to issue shares of Common
         Stock in accordance with such holder's Conversion Notice and pursuant
         to Section 2(f) above at a Conversion Price equal to the Average Market
         Price of the Common Stock for the five (5) consecutive trading days
         preceding such holder's Notice in Response to Inability to Convert (as
         defined below).

                      (b) Mechanics of Fulfilling Holder's Election. The
         Company shall immediately send via facsimile to a holder of Series C
         Preferred Shares, upon receipt of a facsimile copy of a Conversion
         Notice from such holder which cannot be fully satisfied as described in
         Section 5(a) above, a notice of the Company's inability to fully
         satisfy such holder's Conversion Notice (the "INABILITY TO FULLY
         CONVERT NOTICE"). Such Inability to Fully Convert Notice shall indicate
         (i) the reason why the Company is unable to fully satisfy such holder's
         Conversion Notice, (ii) the number of Series C Preferred Shares which
         cannot be converted and (iii) the applicable Mandatory Redemption
         Price. Such holder must within two (2) days of receipt of such
         Inability to Fully Convert Notice deliver written notice via facsimile
         to the Company ("NOTICE IN RESPONSE TO INABILITY TO CONVERT") of its
         election pursuant to Section 5(a) above.

                      (c) Payment of Redemption Price. If such holder shall
         elect to have its shares redeemed pursuant to Section 5(a)(i) above,
         the Company shall pay the Mandatory Redemption Price in cash to such
         holder within thirty (30) days of the Company's receipt of the holder's
         Notice in Response to Inability to Convert. If the Company shall fail
         to pay the applicable Mandatory Redemption Price to such holder on a
         timely basis as described in this Section 5(c) (other than pursuant to
         a dispute as to the determination of the Closing Price or the
         arithmetic calculation of the Redemption Rate),


                                      -15-

<PAGE>   16
         such unpaid amount shall bear interest at the rate of 2.5% per month
         (prorated for partial months) until paid in full. Until the full
         Mandatory Redemption Price is paid in full to such holder, such holder
         may void the Mandatory Redemption with respect to those Series C
         Preferred Shares for which the full Mandatory Redemption Price has not
         been paid and receive back such Series C Preferred Shares.
         Notwithstanding the foregoing, if the Company fails to pay the
         applicable Mandatory Redemption Price within such thirty (30) days time
         period due to a dispute as to the determination of the Closing Price or
         the arithmetic calculation of the Redemption Rate, such dispute shall
         be resolved pursuant to Section 2(f)(iii) above with the term "Closing
         Price" being substituted for the term "Lowest Sale Price" and the term
         "Redemption Rate" being substituted for the term "Conversion Rate".

                      (d) Pro-rata Conversion and Redemption. In the event
         the Company receives a Conversion Notice from more than one holder of
         Series C Preferred Shares on the same day and the Company can convert
         and redeem some, but not all, of the Series C Preferred Shares pursuant
         to this Section 5, the Company shall convert and redeem from each
         holder of Series C Preferred Shares electing to have Series C Preferred
         Shares converted and redeemed at such time an amount equal to such
         holder's pro-rata amount (based on the number of Series C Preferred
         Shares held by such holder relative to the number of Series C Preferred
         Shares outstanding) of all Series C Preferred Shares being converted
         and redeemed at such time.

                  (6) Reissuance of Certificates. In the event of a conversion
         or redemption pursuant to this Certificate of Designations of less than
         all of the Series C Preferred Shares represented by a particular
         Preferred Stock Certificate, the Company shall promptly cause to be
         issued and delivered to the holder of such Series C Preferred Shares a
         preferred stock certificate representing the remaining Series C
         Preferred Shares which have not been so converted or redeemed.

                  (7) Reservation of Shares. The Company shall, so long as any
         of the Series C Preferred Shares are outstanding, reserve and keep
         available out of its authorized and unissued Common Stock, solely for
         the purpose of effecting the conversion of the Series C Preferred
         Shares, such number of shares of Common Stock as shall from time to
         time be sufficient to effect the conversion of all of the Series C
         Preferred Shares then outstanding; provided that the number of shares
         of Common Stock so reserved shall at no time be less than 200% of the
         number of shares of Common Stock for which the Series C Preferred
         Shares are at any time convertible; provided further that such shares
         of Common Stock so reserved shall be allocated for issuance upon
         conversion of Series C Preferred Shares pro rata among the holders of
         Series C Preferred Shares based on the number of Series C Preferred
         Shares held by such holder relative to the total number of authorized
         Series C Preferred Shares.

                  (8) Voting Rights. Holders of Series C Preferred Shares shall
         have no voting rights, except as required by law, including but not
         limited to the General Corporation Law of the State of Delaware, and as
         expressly provided in this Certificate of Designations.


                                      -16-

<PAGE>   17
                  (9) Liquidation, Dissolution, Winding-Up. In the event of any
         voluntary or involuntary liquidation, dissolution or winding up of the
         Company, the holders of the Series C Preferred Shares shall be entitled
         to receive in cash out of the assets of the Company, whether from
         capital or from earnings available for distribution to its stockholders
         (the "PREFERRED FUNDS"), before any amount shall be paid to the holders
         of any of the capital stock of the Company of any class junior in rank
         to the Series C Preferred Shares in respect of the preferences as to
         the distributions and payments on the liquidation, dissolution and
         winding up of the Company, an amount per Series C Preferred Share equal
         to the sum of (i) $1,000 and (ii) an amount equal to the product of
         (.05) (N/365) ($1,000) (such sum being referred to as the "LIQUIDATION
         VALUE"); provided that, if the Preferred Funds are insufficient to pay
         the full amount due to the holders of Series C Preferred Shares and
         holders of shares of other classes or series of preferred stock of the
         Company that are of equal rank with the Series C Preferred Shares as to
         payments of Preferred Funds (the "PARI PASSU SHARES"), then each holder
         of Series C Preferred Shares and Pari Passu Shares shall receive a
         percentage of the Preferred Funds equal to the full amount of Preferred
         Funds payable to such holder as a percentage of the full amount of
         Preferred Funds payable to all holders of Series C Preferred Shares and
         Pari Passu Shares. The purchase or redemption by the Company of stock
         of any class, in any manner permitted by law, shall not, for the
         purposes hereof, be regarded as a liquidation, dissolution or winding
         up of the Company. Neither the consolidation or merger of the Company
         with or into any other Person, nor the sale or transfer by the Company
         of less than substantially all of its assets, shall, for the purposes
         hereof, be deemed to be a liquidation, dissolution or winding up of the
         Company. No holder of Series C Preferred Shares shall be entitled to
         receive any amounts with respect thereto upon any liquidation,
         dissolution or winding up of the Company other than the amounts
         provided for herein.

                  (10) Preferred Rank. All shares of Common Stock shall be of
         junior rank to all Series C Preferred Shares in respect to the
         preferences as to distributions and payments upon the liquidation,
         dissolution and winding up of the Company. The rights of the shares of
         Common Stock shall be subject to the preferences and relative rights of
         the Series C Preferred Shares. The Series C Preferred Shares shall be
         of equal rank with shares of the Company's Series B Convertible
         Preferred Stock. Without the prior express written consent of the
         holders of not less than two-thirds (2/3) of the then outstanding
         Series C Preferred Shares, the Company may not hereafter authorize or
         issue additional or other capital stock that is of senior rank to the
         Series C Preferred Shares in respect of the preferences as to
         distributions and payments upon the liquidation, dissolution and
         winding up of the Company. In the event of the merger or consolidation
         of the Company with or into another corporation, the Series C Preferred
         Shares shall maintain their relative powers, designations and
         preferences provided for herein and no merger shall result inconsistent
         therewith.

                  (11) Restriction on Redemption and Cash Dividends with respect
         to Other Capital Stock. Until all of the Series C Preferred Shares have
         been converted or redeemed as provided herein, the Company shall not
         redeem, or declare or pay any cash dividend or distribution on, its
         Common Stock without the prior express written consent


                                      -17-

<PAGE>   18
         of the holders of not less than two-thirds (2/3) of the then
         outstanding Series C Preferred Shares.

                  (12) Limitation on Number of Conversion Shares. The Company
         shall not be obligated to issue, in the aggregate, more than 20,946,476
         shares of Common Stock (such amount to be proportionately and equitably
         adjusted from time to time in the event of stock splits, stock
         dividends, combinations, reverse stock splits, reclassification,
         capital reorganizations and similar events relating to the Common
         Stock) (the "AMEX CAP") upon conversion of the Series C Preferred
         Shares, if issuance of a larger number of shares of Common Stock would
         constitute a breach of the Company's obligations under the rules or
         regulations of AMEX or any other principal securities exchange or
         market upon which the Common Stock becomes traded. The Amex Cap shall
         be allocated among the Series C Preferred Shares pro rata based on the
         total number of authorized Series C Preferred Shares.

                  (13) Vote to Change the Terms of Series C Preferred Shares.
         The affirmative vote at a meeting duly called for such purpose or the
         written consent without a meeting, of the holders of not less than
         two-thirds (2/3) of the then outstanding Series C Preferred Shares,
         shall be required for any change to this Certificate of Designations or
         the Company's Certificate of Incorporation which would amend, alter,
         change or repeal any of the powers, designations, preferences and
         rights of the Series C Preferred Shares.

                  (14) Lost or Stolen Certificates. Upon receipt by the Company
         of evidence satisfactory to the Company of the loss, theft, destruction
         or mutilation of any Preferred Stock Certificates representing the
         Series C Preferred Shares, and, in the case of loss, theft or
         destruction, of any indemnification undertaking by the holder to the
         Company and, in the case of mutilation, upon surrender and cancellation
         of the Preferred Stock Certificate(s), the Company shall execute and
         deliver new preferred stock certificate(s) of like tenor and date;
         provided, however, the Company shall not be obligated to re-issue
         preferred stock certificates if the holder contemporaneously requests
         the Company to convert such Series C Preferred Shares into Common
         Stock.




                                      -18-

<PAGE>   19
         IN WITNESS WHEREOF, the Company has caused this Certificate of
Designations to be signed by Virginia Walker, its Executive Vice President,
Finance and Administration, Chief Financial Officer and Secretary, as of the
17th day of January 1997.



                                       JTS CORPORATION


                                       By:_________________________________
                                       Name: Virginia Walker
                                       Its:  Executive Vice President, Finance
                                             and Administration, Chief Financial
                                             Officer and Secretary
         


<PAGE>   20
                                    EXHIBIT I

                                 JTS CORPORATION
                                CONVERSION NOTICE


Reference is made to the Certificate of Designations, Preferences and Rights of
JTS Corporation (the "CERTIFICATE OF DESIGNATIONS"). In accordance with and
pursuant to the Certificate of Designations, the undersigned hereby elects to
convert the number of shares of Series C Convertible Preferred Stock, $.001 par
value per share (the "SERIES C PREFERRED SHARES"), of JTS Corporation, a
Delaware corporation (the "COMPANY"), indicated below into shares of Common
Stock, $.001 par value per share (the "COMMON STOCK"), of the Company, by
tendering the stock certificate(s) representing the share(s) of Series C
Preferred Shares specified below as of the date specified below.

         Date of Conversion:                  _______________________________

         Number of Series C 
         Preferred Shares to be converted:    _______________________________

         Stock certificate no(s). of Series C
         Preferred Shares to be converted:    _______________________________

Please confirm the following information:

         Conversion Price:                    _______________________________

         Number of shares of Common Stock     _______________________________
         to be issued:

         Additional Amount:                   _______________________________

Please issue the Common Stock and, if applicable, any check drawn on an account
of the Company into which the Series C Preferred Shares are being converted in
the following name and to the following address:

         Issue to:                            _______________________________

                                              _______________________________

                                              _______________________________

                                              _______________________________


         Facsimile Number:                    _______________________________

         Authorization:                       _______________________________

                                              By:____________________________

                                              Title:_________________________

         Dated:                               _______________________________

<PAGE>   1

                                                                     EXHIBIT 4.6


                         REGISTRATION RIGHTS AGREEMENT


         REGISTRATION RIGHTS AGREEMENT (this "AGREEMENT"), dated as of January
22, 1997, by and among JTS Corporation, a Delaware corporation, with
headquarters located at 166 Baypointe Parkway, San Jose, California 95134 (the
"COMPANY"), and the undersigned buyers (each, a "BUYER" and collectively, the
"BUYERS").

         WHEREAS:

         A.      In connection with the Securities Purchase Agreement by and
among the parties of even date herewith (the "SECURITIES PURCHASE AGREEMENT"),
the Company has agreed, upon the terms and subject to the conditions of the
Securities Purchase Agreement, to issue and sell to the Buyers shares of the
Company's Series C Convertible Preferred Stock (the "SERIES C PREFERRED
SHARES"), which will be convertible into shares of the Company's common stock,
$.001 par value per share (the "COMMON STOCK") (as converted, the "CONVERSION
SHARES") in accordance with the terms of the Company's Certificate of
Designations, Preferences and Rights of the Series C Preferred Shares; and

         B.      To induce the Buyers to execute and deliver the Securities
Purchase Agreement, the Company has agreed to provide certain registration
rights under the Securities Act of 1933, as amended, and the rules and
regulations thereunder, or any similar successor statute (collectively, the
"1933 ACT"), and applicable state securities laws:

         NOW, THEREFORE, in consideration of the premises and the mutual
covenants contained herein and other good and valuable consideration, the
receipt and sufficiency of which are hereby acknowledged, the Company and the
Buyers hereby agree as follows:

         1.      DEFINITIONS.

                 As used in this Agreement, the following terms shall have the
following meanings:

                 a.       "INVESTOR" means a Buyer and any transferee or
assignee thereof to whom a Buyer assigns its rights under this Agreement and
who agrees to become bound by the provisions of this Agreement in accordance
with Section 9.

                 b.       "PERSON" means a corporation, a limited liability
company, an association, a partnership, an organization, a business, an
individual, a governmental or political subdivision thereof or a governmental
agency.

                 c.       "REGISTER," "REGISTERED," and "REGISTRATION" refer to
a registration effected by preparing and filing one or more Registration
Statements in compliance with the 1933 Act and pursuant to Rule 415 under the
1933 Act or any successor rule providing for offering securities on a
continuous basis ("RULE 415"), and the declaration or ordering of effectiveness
of such Registration Statement(s) by the United States Securities and Exchange
Commission (the "SEC").
<PAGE>   2
                 d.       "REGISTRABLE SECURITIES" means the Conversion Shares
issued or issuable upon conversion of the Series C Preferred Shares and any
shares of capital stock issued or issuable with respect to the Conversion
Shares or the Series C Preferred Shares as a result of any stock split, stock
dividend, recapitalization, exchange or similar event.

                 e.       "REGISTRATION STATEMENT" means a registration
statement of the Company filed under the 1933 Act.

         Capitalized terms used herein and not otherwise defined herein shall
have the respective meanings set forth in the Securities Purchase Agreement.

         2.      REGISTRATION.

                 a.       Mandatory Registration.  The Company shall prepare,
and, on or prior to twenty (20) days after the date of issuance of the relevant
Series C Preferred Shares, file with the SEC a Registration Statement or
Registration Statements (as is necessary) on Form S-1 (or, if such form is
unavailable for such a registration, on such other form as is available for
such a registration, subject to the consent of each Buyer and the provisions of
Section 2(e), which consent will not be unreasonably withheld), covering the
resale of all of the Registrable Securities, which Registration Statement(s)
shall state that, in accordance with Rule 416 promulgated under the 1933 Act,
such Registration Statement(s) also covers such indeterminate number of
additional shares of Common Stock as may become issuable upon conversion of the
Series C Preferred Shares (i) to prevent dilution resulting from stock splits,
stock dividends or similar transactions and (ii) by reason of changes in the
Conversion Price or Conversion Rate of the Series C Preferred Shares in
accordance with the terms thereof.  Such Registration Statement shall initially
register for resale at least 17,000,000 shares of Common Stock, subject to
adjustment as provided in Section 3(b), and such registered shares of Common
Stock shall be allocated among the Investors pro rata based on the total number
of Registrable Securities issued or issuable as of each date that a
Registration Statement, as amended, relating to the resale of the Registrable
Securities is declared effective by the SEC.  The Company shall use its best
efforts to have the Registration Statement declared effective by the SEC within
eighty (80) days after the issuance of the relevant Series C Preferred Shares.

                 b.       Underwritten Offering.  If any offering pursuant to a
Registration Statement pursuant to Section 2(a) involves an underwritten
offering, the Buyers shall have the right to select one legal counsel and an
investment banker or bankers and manager or managers to administer their
interest in the offering, which investment banker or bankers or manager or
managers shall be reasonably satisfactory to the Company.

                 c.       Piggy-Back Registrations.  If at any time prior to
the expiration of the Registration Period (as hereinafter defined) the Company
proposes to file with the SEC a Registration Statement relating to an offering
for its own account or the account of others under the 1933 Act of any of its
securities (other than on Form S-4 or Form S-8 or their then equivalents
relating to securities to be issued solely in connection with any acquisition
of any entity or business or equity securities issuable in connection with
stock option or other employee benefit plans) the Company shall promptly send
to each Investor who is entitled to registration rights under this Section 2(c)
written notice of the Company's intention to file a Registration





                                      -2-
<PAGE>   3
Statement and of such Investor's rights under this Section 2(c) and, if within
twenty (20) days after receipt of such notice, such Investor shall so request
in writing, the Company shall include in such Registration Statement all or any
part of the Registrable Securities such Investor requests to be registered,
subject to the priorities set forth in Section 2(d) below.  No right to
registration of Registrable Securities under this Section 2(c) shall be
construed to limit any registration required under Section 2(a).  The
obligations of the Company under this Section 2(c) may be waived by Investors
holding a majority of the Registrable Securities.  If an offering in connection
with which an Investor is entitled to registration under this Section 2(c) is
an underwritten offering, then each Investor whose Registrable Securities are
included in such Registration Statement shall, unless otherwise agreed by the
Company, offer and sell such Registrable Securities in an underwritten offering
using the same underwriter or underwriters and, subject to the provisions of
this Agreement, on the same terms and conditions as other shares of Common
Stock included in such underwritten offering.

                 d.       Priority in Piggy-Back Registration Rights in
connection with Registrations for Company Account.  If the registration
referred to in Section 2(c) is to be an underwritten public offering for the
account of the Company and the managing underwriter(s) advise the Company in
writing, that in their reasonable good faith opinion, marketing or other
factors dictate that a limitation on the number of shares of Common Stock which
may be included in the Registration Statement is necessary to facilitate and
not adversely affect the proposed offering, then the Company shall include in
such registration: (1) first, all securities the Company proposes to sell for
its own account, (2) second, up to the full number of securities proposed to be
registered for the account of the holders of securities entitled to inclusion
of their securities in the Registration Statement by reason of demand
registration rights, and (3) third, the securities requested to be registered
by the Investors and holders of the Company's Series B Convertible Preferred
Stock, Common Stock issued or issuable upon conversion of the Company's Series
B Convertible Preferred Stock or Common Stock issued in connection with the
Company's Series A Convertible Preferred Stock entitled to participate in the
registration, drawn from them pro rata based on the number each has requested
to be included in such registration.

                 e.       Eligibility for Form S-3.  The Company represents and
warrants that it will meet the requirements for the use of Form S-3 for
registration of the sale by the Buyers and any other Investor of the
Registrable Securities on and after August 21, 1997 and the Company has filed
and shall file all reports required to be filed by the Company with the SEC in
a timely manner so as to obtain and maintain such eligibility for the use of
Form S-3.  The Company shall undertake to register the Registrable Securities
on Form S-3 as soon as such form is available, provided that the Company shall
maintain the effectiveness of the Registration Statement then in effect until
such time as a Registration Statement on Form S-3 covering the Registrable
Securities has been declared effective by the SEC.

         3.      RELATED OBLIGATIONS.

         Whenever an Investor has requested that any Registrable Securities be
registered pursuant to Section 2(c) or at such time as the Company is obligated
to file a Registration Statement with the SEC pursuant to Section 2(a), the
Company will use its best efforts to effect the registration





                                      -3-
<PAGE>   4
of the Registrable Securities in accordance with the intended method of
disposition thereof and, pursuant thereto, the Company shall have the following
obligations:

                 a.       The Company shall promptly prepare and file with the
SEC a Registration Statement with respect to the Registrable Securities (on or
prior to twenty (20) days after the date of issuance of the relevant Series C
Preferred Shares for the registration of Registrable Securities pursuant to
Section 2(a)) and use its best efforts to cause such Registration Statement(s)
relating to Registrable Securities to become effective as soon as possible
after such filing (within eighty (80) days after the issuance of the relevant
Series C Preferred Shares for the registration of Registrable Securities
pursuant to Section 2(a)), and keep the Registration Statement(s) effective
pursuant to Rule 415 at all times until the earlier of (i) the date as of which
the Investors may sell all of the Registrable Securities without restriction
pursuant to Rule 144(k) promulgated under the 1933 Act (or successor thereto)
or (ii) the date on which (A) the Investors shall have sold all the Registrable
Securities and (B) none of the Series C Preferred Shares is outstanding (the
"REGISTRATION PERIOD"), which Registration Statement(s) (including any
amendments or supplements thereto and prospectuses contained therein) shall not
contain any untrue statement of a material fact or omit to state a material
fact required to be stated therein, or necessary to make the statements
therein, in light of the circumstances in which they were made, not misleading;
provided, however, that for up to a period of thirty (30) days, the Company may
delay seeking effectiveness of the Registration Statement if such Registration
Statement would be required to disclose material non-public information
concerning the Company, the disclosure of which at the time would not be, in
the good faith opinion of the Board of Directors of the Company, in the best
interest of the Company and, in the opinion of counsel to the Company,
otherwise required (a "REGISTRATION DELAY"); provided, further, that the
Company shall promptly (x) notify the Investors in writing of the existence of
events giving rise to a Registration Delay and (y) provide the Investors with
such opinions in writing.  The provisions of Section 2(c) of the Certificate of
Designations shall not be applicable during the period of a Registration Delay.

                 b.       The Company shall prepare and file with the SEC such
amendments (including post-effective amendments) and supplements to the
Registration Statement(s) and the prospectus(es) used in connection with the
Registration Statement(s), which prospectus(es) are to be filed pursuant to
Rule 424 promulgated under the 1933 Act, as may be necessary to keep the
Registration Statement(s) effective at all times during the Registration
Period, and, during such period, comply with the provisions of the 1933 Act
with respect to the disposition of all Registrable Securities of the Company
covered by the Registration Statement(s) until such time as all of such
Registrable Securities shall have been disposed of in accordance with the
intended methods of disposition by the seller or sellers thereof as set forth
in the Registration Statement(s).  In the event the number of shares available
under a Registration Statement filed pursuant to this Agreement is insufficient
to cover all of the Registrable Securities, the Company shall amend the
Registration Statement, or file a new Registration Statement (on the short form
available therefor, if applicable), or both, so as to cover all of the
Registrable Securities, in each case, as soon as practicable, but in any event
within twenty (20) days after the necessity therefor arises (based on the
market price of the Common Stock and other relevant factors on which the
Company reasonably elects to rely).  The Company shall use it best efforts to
cause such amendment and/or new Registration Statement to become effective as
soon as practicable





                                      -4-
<PAGE>   5
following the filing thereof.  For purposes of the foregoing provision, the
number of shares available under a Registration Statement shall be deemed
"insufficient to cover all of the Registrable Securities" if at any time the
number of Registrable Securities issued or issuable upon conversion of the
Series C Preferred Shares is greater than the quotient determined by dividing
(i) the number of shares of Common Stock available for resale under such
Registration Statement by (ii) 1.50; provided that in the case of the initial
registration of the Registrable Securities pursuant to Section 2(a), the
Company shall be required to register at least 17,000,000 shares of Common
Stock for resale.  For purposes of the calculation set forth in the foregoing
sentence, any restrictions on the convertibility of the Series C Preferred
Shares shall be disregarded and such calculation shall assume that the Series C
Preferred Shares are then convertible into shares of Common Stock at the then
prevailing Conversion Rate (as defined in the Company's Amended Certificate of
Incorporation).

                 c.       The Company shall furnish to each Investor whose
Registrable Securities are included in the Registration Statement(s) and its
legal counsel without charge (i) promptly after the same is prepared and filed
with the SEC at least one copy of the Registration Statement and any amendment
thereto, including financial statements and schedules, all documents
incorporated therein by reference and all exhibits, the prospectus(es) included
in such Registration Statement(s) (including each preliminary prospectus) and,
with regards to the Registration Statement, any correspondence by or on behalf
of the Company to the SEC or the staff of the SEC and any correspondence from
the SEC or the staff of the SEC to the Company or its representatives, (ii)
upon the effectiveness of any Registration Statement, ten (10) copies of the
prospectus included in such Registration Statement and all amendments and
supplements thereto (or such other number of copies as such Investor may
reasonably request) and (iii) such other documents, including any preliminary
prospectus, as such Investor may reasonably request in order to facilitate the
disposition of the Registrable Securities owned by such Investor.

                 d.       The Company shall use reasonable efforts to (i)
register and qualify the Registrable Securities covered by the Registration
Statement(s) under such other securities or "blue sky" laws of such
jurisdictions in the United States as any Investor reasonably requests, (ii)
prepare and file in those jurisdictions. such amendments (including
post-effective amendments) and supplements to such registrations and
qualifications as may be necessary to maintain the effectiveness thereof during
the Registration Period, (iii) take such other actions as may be necessary to
maintain such registrations and qualifications in effect at all times during
the Registration Period, and (iv) take all other actions reasonably necessary
or advisable to qualify the Registrable Securities for sale in such
jurisdictions; provided, however, that the Company shall not be required in
connection therewith or as a condition thereto to (a) qualify to do business in
any jurisdiction where it would not otherwise be required to qualify but for
this Section 3(d), (b) subject itself to general taxation in any such
jurisdiction, or (c) file a general consent to service of process in any such
jurisdiction.  The Company shall promptly notify each Investor who holds
Registrable Securities of the receipt by the Company of any notification with
respect to the suspension of the registration or qualification of any of the
Registrable Securities for sale under the securities or "blue sky" laws of any
jurisdiction in the United States or its receipt of actual notice of the
initiation or threatening of any proceeding for such purpose.

                 e.       In the event Investors who hold a majority of the
Registrable Securities being offered in an offering select underwriters for the
offering, the Company shall enter into





                                      -5-
<PAGE>   6
and perform its obligations under an underwriting agreement, in usual and
customary form, including, without limitation, customary indemnification and
contribution obligations, with the underwriters of such offering.

                 f.       As promptly as practicable after becoming aware of
such event, the Company shall notify each Investor in writing of the happening
of any event, of which the Company has knowledge, as a result of which the
prospectus included in a Registration Statement, as then in effect, includes an
untrue statement of a material fact or omission to state a material fact
required to be stated therein or necessary to make the statements therein, in
light of the circumstances under which they were made, not misleading, and
promptly prepare a supplement or amendment to the Registration Statement to
correct such untrue statement or omission, and deliver ten (10) copies of such
supplement or amendment to each Investor (or such other number of copies as
such Investor may reasonably request).  The Company shall also promptly notify
each Investor in writing (i) when a prospectus or any prospectus supplement or
post-effective amendment has been filed, and when a Registration Statement or
any post-effective amendment has become effective (notification of such
effectiveness shall be delivered to each Investor by facsimile on the same day
of such effectiveness and by overnight mail), (ii) of any request by the SEC
for amendments or supplements to a Registration Statement or related prospectus
or related information, and (iii) of the Company's reasonable determination
that a post-effective amendment to a Registration Statement would be
appropriate.  Notwithstanding anything to the contrary in this Section 3(f),
not more than once in any twelve (12) month period, for up to a period of
thirty (30) days, the Company may delay the disclosure of material non-public
information concerning the Company the disclosure of which at the time is not,
in the good faith opinion of the Board of Directors of the Company, in the best
interest of the Company and, in the opinion of counsel to the Company,
otherwise required (an "ALLOWED DELAY"); provided, further, that the Company
shall promptly (i) notify the Investors in writing of the existence of material
non-public information giving rise to an Allowed Delay, (ii) provide the
Investors such opinions in writing and (iii) advise the Investors in writing to
cease all sales under the Registration Statement until the end of the Allowed
Delay.  The provisions of Section 2(c) of the Certificate of Designations shall
not be applicable during the period of an Allowed Delay.  Upon expiration of
the Allowed Delay, the Company shall again be bound by the first sentence of
this Section 3(f) with respect to the information giving rise thereto.

                 g.       The Company shall use its best efforts to prevent the
issuance of any stop order or other suspension of effectiveness of a
Registration Statement, or the suspension of the qualification of any of the
Registrable Securities for sale in any jurisdiction and, if such an order or
suspension is issued, to obtain the withdrawal of such order or suspension at
the earliest possible moment and to notify each Investor who holds Registrable
Securities being sold (and, in the event of an underwritten offering, the
managing underwriters) of the issuance of such order and the resolution thereof
or its receipt of actual notice of the initiation or threat of any proceeding
for such purpose.

                 h.       The Company shall permit the Investors and a single
firm of counsel, initially Katten Muchin & Zavis or such other counsel as
thereafter designated as selling stockholders' counsel by the Investors who
hold a majority of the Registrable Securities being sold, to review and comment
upon the Registration Statement(s) and all amendments and





                                      -6-
<PAGE>   7
supplements thereto at least seven (7) days prior to their filing with the SEC,
and not file any document in a form to which such counsel reasonably objects.
The Company shall not submit a request for acceleration of the effectiveness of
a Registration Statement(s) or any amendment or supplement thereto without the
prior approval of such counsel, which consent shall not be unreasonably
withheld.

                 i.       At the request of the Investors who hold a majority
of the Registrable Securities being sold, the Company shall furnish, on the
date that Registrable Securities are delivered to an underwriter, if any, for
sale in connection with the Registration Statement (i) if required by an
underwriter, a letter, dated such date, from the Company's independent
certified public accountants in form and substance as is customarily given by
independent certified public accountants to underwriters in an underwritten
public offering, addressed to the underwriters, and (ii) an opinion, dated as
of such date, of counsel representing the Company for purposes of such
Registration Statement, in form, scope and substance as is customarily given in
an underwritten public offering, addressed to the underwriters and the
Investors.

                 j.       The Company shall make available for inspection by
(i) any Investor, (ii) any underwriter participating in any disposition
pursuant to a Registration Statement, (iii) one firm of attorneys and one firm
of accountants or other agents retained by the Investors, and (iv) one firm of
attorneys retained by all such underwriters (collectively, the "INSPECTORS")
all pertinent financial and other records, and pertinent corporate documents
and properties of the Company (collectively, the "RECORDS"), as shall be
reasonably deemed necessary by each Inspector to enable each Inspector to
exercise its due diligence responsibility, and cause the Company's officers,
directors and employees to supply all information which any Inspector may
reasonably request for purposes of such due diligence; provided, however, that
each Inspector shall hold in strict confidence and shall not make any
disclosure (except to an Investor) or use of any Record or other information
which the Company determines in good faith to be confidential, and of which
determination the Inspectors are so notified, unless (a) the disclosure of such
Records is necessary to avoid or correct a misstatement or omission in any
Registration Statement or is otherwise required under the 1933 Act, (b) the
release of such Records is ordered pursuant to a final, non-appealable subpoena
or order from a court or government body of competent jurisdiction, or (c) the
information in such Records has been made generally available to the public
other than by disclosure in violation of this or any other agreement.  Each
Investor agrees that it shall, upon learning that disclosure of such Records is
sought in or by a court or governmental body of competent jurisdiction or
through other means, give prompt notice to the Company and allow the Company,
at its expense, to undertake appropriate action to prevent disclosure of, or to
obtain a protective order for, the Records deemed confidential.

                 k.       The Company shall hold in confidence and not make any
disclosure of information concerning an Investor provided to the Company unless
(i) disclosure of such information is necessary to comply with federal or state
securities laws, (ii) the disclosure of such information is necessary to avoid
or correct a misstatement or omission in any Registration Statement, (iii) the
release of such information is ordered pursuant to a subpoena or other final,
non-appealable order from a court or governmental body of competent
jurisdiction, or (iv) such information has been made generally available to the
public other than by disclosure in violation of this or any other agreement.
The Company agrees that it shall, upon learning that disclosure of such
information concerning an Investor is sought in or by a court or governmental
body of





                                      -7-
<PAGE>   8
competent jurisdiction or through other means, give prompt written notice to
such Investor and allow such Investor, at the Investor's expense, to undertake
appropriate action to prevent disclosure of, or to obtain a protective order
for, such information.

                 l.       The Company shall use its best efforts either to (i)
cause all the Registrable Securities covered by a Registration Statement to be
listed on each national securities exchange on which securities of the same
class or series issued by the Company are then listed, if any, if the listing
of such Registrable Securities is then permitted under the rules of such
exchange, or (ii) secure designation and quotation of all the Registrable
Securities covered by the Registration Statement on the Nasdaq National Market
System or, if, despite the Company's best efforts to satisfy the preceding
clause (i) or (ii), the Company is unsuccessful in satisfying the preceding
clause (i) or (ii), to secure the inclusion for quotation on the Nasdaq
SmallCap Market for such Registrable Securities and, without limiting the
generality of the foregoing, to arrange for at least two market makers to
register with the National Association of Securities Dealers, Inc. ("NASD") as
such with respect to such Registrable Securities.  The Company shall pay all
fees and expenses in connection with satisfying its obligation under this
Section 3(1).

                 m.       The Company shall cooperate with the Investors who
hold Registrable Securities being offered and, to the extent applicable, any
managing underwriter or underwriters, to facilitate the timely preparation and
delivery of certificates (not bearing any restrictive legend) representing the
Registrable Securities to be offered pursuant to a Registration Statement and
enable such certificates to be in such denominations or amounts, as the case
may be, as the managing underwriter or underwriters, if any, or, if there is no
managing underwriter or underwriters, the Investors may reasonably request and
registered in such names as the managing underwriter or underwriters, if any,
or the Investors may request.  Not later than the date on which any
Registration Statement registering the resale of Registrable Securities is
declared effective, the Company shall deliver to its transfer agent
instructions, accompanied by any reasonably required opinion of counsel, that
permit sales of unlegended securities in a timely fashion that complies with
then mandated securities settlement procedures for regular way market
transactions.

                 n.       The Company shall take all other reasonable actions
necessary to expedite and facilitate disposition by the Investors of
Registrable Securities pursuant to a Registration Statement.

                 o.       The Company shall provide a transfer agent and
registrar of all such Registrable Securities not later than the effective date
of such Registration Statement.

                 p.       If requested by the managing underwriters or an
Investor, the Company shall immediately incorporate in a prospectus supplement
or post-effective amendment such information as the managing underwriters and
the Investors agree should be included therein relating to the sale and
distribution of Registrable Securities, including, without limitation,
information with respect to the number of Registrable Securities being sold to
such underwriters, the purchase price being paid therefor by such underwriters
and with respect to any other terms of the underwritten (or best efforts
underwritten) offering of the Registrable Securities to be sold in such
offering; make all required filings of such prospectus supplement or
post-effective amendment as soon as notified of the matters to be incorporated
in such prospectus supplement





                                      -8-
<PAGE>   9
or post-effective amendment; and supplement or make amendments to any
Registration Statement if requested by a shareholder or any underwriter of such
Registrable Securities.

                 q.       The Company shall use its best efforts to cause the
Registrable Securities covered by the applicable Registration Statement to be
registered with or approved by such other governmental agencies or authorities
as may be necessary to consummate the disposition of such Registrable
Securities.

                 r.       The Company shall otherwise use its best efforts to
comply with all applicable rules and regulations of the SEC in connection with
any registration hereunder.

         4.      OBLIGATIONS OF THE INVESTORS.

                 a.       At least seven (7) days prior to the first
anticipated filing date of the Registration Statement, the Company shall notify
each Investor in writing of the information the Company requires from each such
Investor if such Investor elects to have any of such Investor's Registrable
Securities included in the Registration Statement.  It shall be a condition
precedent to the obligations of the Company to complete the registration
pursuant to this Agreement with respect to the Registrable Securities of a
particular Investor that such Investor shall furnish to the Company such
information regarding itself, the Registrable Securities held by it and the
intended method of disposition of the Registrable Securities held by it as
shall be reasonably required to effect the registration of such Registrable
Securities and shall execute such documents in connection with such
registration as the Company may reasonably request.

                 b.       Each Investor by such Investor's acceptance of the
Registrable Securities agrees to cooperate with the Company as reasonably
requested by the Company in connection with the preparation and filing of the
Registration Statement(s) hereunder, unless such Investor has notified the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement.

                 c.       In the event Investors holding a majority of the
Registrable Securities being registered determine to engage the services of an
underwriter, each Investor agrees to enter into and perform such Investor's
obligations under an underwriting agreement, in usual and customary form,
including, without limitation, customary indemnification and contribution
obligations, with the managing underwriter of such offering and take such other
actions as are reasonably required in order to expedite or facilitate the
disposition of the Registrable Securities, unless such Investor notifies the
Company in writing of such Investor's election to exclude all of such
Investor's Registrable Securities from the Registration Statement(s).

                 d.       Each Investor agrees that, upon receipt of any notice
from the Company of the happening of any event of the kind described in Section
3(g) or the first sentence of 3(f), such Investor will immediately discontinue
disposition of Registrable Securities pursuant to the Registration Statement(s)
covering such Registrable Securities until such Investor's receipt of the
copies of the supplemented or amended prospectus contemplated by Section 3(g)
or the first sentence of 3(f) and, if so directed by the Company, such Investor
shall deliver to the Company (at the expense of the Company) or destroy all
copies in such Investor's possession, of the prospectus covering such
Registrable Securities current at the time of receipt of such notice.





                                      -9-
<PAGE>   10
                 e.       No Investor may participate in any underwritten
registration hereunder unless such Investor (i) agrees to sell such Investor's
Registrable Securities on the basis provided in any underwriting arrangements
approved by the Investors entitled hereunder to approve such arrangements, (ii)
completes and executes all questionnaires, powers of attorney, indemnities,
underwriting agreements and other documents reasonably required under the terms
of such underwriting arrangements, and (iii) agrees to pay its pro rata share
of all underwriting discounts and commissions.

         5.      EXPENSES OF REGISTRATION.

                 All reasonable expenses, other than underwriting discounts and
commissions, incurred in connection with registrations, filings or
qualifications pursuant to Sections 2 and 3, including, without limitation, all
registration, listing and qualifications fees, printers and accounting fees,
and fees and disbursements of counsel for the Company and fees and
disbursements of one counsel for the Investors, shall be borne by the Company.

         6.      INDEMNIFICATION.

                 In the event any Registrable Securities are included in a
Registration Statement under this Agreement:

                 a.       To the fullest extent permitted by law, the Company
will, and hereby does, indemnify, hold harmless and defend each Investor who
holds such Registrable Securities, the directors, officers, partners,
employees, agents and each Person, if any, who controls any Investor within the
meaning of the 1933 Act or the Securities Exchange Act of 1934, as amended (the
"1934 ACT"), and any underwriter (as defined in the 1933 Act) for the
Investors, and the directors and officers of, and each Person, if any, who
controls, any such underwriter within the meaning of the 1933 Act or the 1934
Act (each, an "INDEMNIFIED PERSON"), against any losses, claims, damages,
liabilities, judgments, fines, penalties, charges, costs, attorneys' fees,
amounts paid in settlement or expenses, joint or several, (collectively,
"CLAIMS") incurred in investigating, preparing or defending any action, claim,
suit, inquiry, proceeding, investigation or appeal taken from the foregoing by
or before any court or governmental, administrative or other regulatory agency,
body or the SEC, whether pending or threatened, whether or not an indemnified
party is or may be a party thereto ("INDEMNIFIED DAMAGES"), to which any of
them may become subject insofar as such Claims (or actions or proceedings,
whether commenced or threatened, in respect thereof) arise out of or are based
upon: (i) any untrue statement or alleged untrue statement of a material fact
in a Registration Statement or any post-effective amendment thereto or in any
filing made in connection with the qualification of the offering under the
securities or other "blue sky" laws of any jurisdiction in which Registrable
Securities are offered ("BLUE SKY FILING"), or the omission or alleged omission
to state a material fact required to be stated therein or necessary to make the
statements therein, in light of the circumstances under which the statements
therein were made, not misleading, (ii) any untrue statement or alleged untrue
statement of a material fact contained in any preliminary prospectus if used
prior to the effective date of such Registration Statement, or contained in the
final prospectus (as amended or supplemented, if the Company files any
amendment thereof or supplement thereto with the SEC) or the omission or
alleged omission to state therein any material fact necessary to make the
statements made therein, in light of the circumstances under which the
statements therein





                                      -10-
<PAGE>   11
were made, not misleading, or (iii) any violation or alleged violation by the
Company of the 1933 Act, the 1934 Act, any other law, including, without
limitation, any state securities law, or any rule or regulation thereunder
relating to the offer or sale of the Registrable Securities pursuant to a
Registration Statement (the matters in the foregoing clauses (i) through (iii)
being, collectively, "VIOLATIONS").  Subject to the restrictions set forth in
Section 6(d) with respect to the number of legal counsel, the Company shall
reimburse the Investors and each such underwriter or controlling person,
promptly as such expenses are incurred and are due and payable, for any legal
fees or other reasonable expenses incurred by them in connection with
investigating or defending any such Claim.  Notwithstanding anything to the
contrary contained herein, the indemnification agreement contained in this
Section 6(a): (i) shall not apply to a Claim arising out of or based upon a
Violation which occurs in reliance upon and in conformity with information
furnished in writing to the Company by any Indemnified Person or underwriter
for such Indemnified Person expressly for use in connection with the
preparation of the Registration Statement or any such amendment thereof or
supplement thereto, if such prospectus was timely made available by the Company
pursuant to Section 3(c); (ii) with respect to any preliminary prospectus,
shall not inure to the benefit of any such person from whom the person
asserting any such Claim purchased the Registrable Securities that are the
subject thereof (or to the benefit of any person controlling such person) if
the untrue statement or omission of material fact contained in the preliminary
prospectus was corrected in the prospectus, as then amended or supplemented, if
such prospectus was timely made available by the Company pursuant to Section
3(c), and the Indemnified Person was promptly advised in writing not to use the
incorrect prospectus prior to the use giving rise to a violation and such
Indemnified Person, notwithstanding such advice, used it; (iii) shall not be
available to the extent such Claim is based on a failure of the Investor to
deliver or to cause to be delivered the prospectus made available by the
Company; and (iv) shall not apply to amounts paid in settlement of any Claim if
such settlement is effected without the prior written consent of the Company,
which consent shall not be unreasonably withheld.  Such indemnity shall remain
in full force and effect regardless of any investigation made by or on behalf
of the Indemnified Person and shall survive the transfer of the Registrable
Securities by the Investors pursuant to Section 9.

                 b.       In connection with any Registration Statement in
which an Investor is participating, each such Investor agrees to severally and
not jointly indemnify, hold harmless and defend, to the same extent and in the
same manner as is set forth in Section 6(a), the Company, each of its
directors, each of its officers who signs the Registration Statement, each
Person, if any, who controls the Company within the meaning of the 1933 Act or
the 1934 Act (collectively and together with an Indemnified Person, an
"INDEMNIFIED PARTY"), against any Claim or Indemnified Damages to which any of
them may become subject, under the 1933 Act, the 1934 Act or otherwise, insofar
as such Claim or Indemnified Damages arise out of or are based upon any
Violation, in each case to the extent, and only to the extent, that such
Violation occurs in reliance upon and in conformity with written information
furnished to the Company by such Investor expressly for use in connection with
such Registration Statement; and, subject to Section 6(d), such Investor will
reimburse any legal or other expenses reasonably incurred by them in connection
with investigating or defending any such Claim; provided, however, that the
indemnity agreement contained in this Section 6(b) and Section 7 shall not
apply to amounts paid in settlement of any Claim if such settlement is effected
without the prior written consent of such Investor, which consent shall not be
unreasonably withheld; provided, further, however, that the Investor shall be
liable under this Section 6(b) for only that amount of a Claim or





                                      -11-
<PAGE>   12
Indemnified Damages as does not exceed the net proceeds to such Investor as a
result of the sale of Registrable Securities pursuant to such Registration
Statement.  Such indemnity shall remain in full force and effect regardless of
any investigation made by or on behalf of such Indemnified Party and shall
survive the transfer of the Registrable Securities by the Investors pursuant to
Section 9.  Notwithstanding anything to the contrary contained herein, the
indemnification agreement contained in this Section 6(b) with respect to any
preliminary prospectus shall not inure to the benefit of any Indemnified Party
if the untrue statement or omission of material fact contained in the
preliminary prospectus was corrected on a timely basis in the prospectus, as
then amended or supplemented.

                 c.       The Company shall be entitled to receive indemnities
from underwriters, selling brokers, dealer managers and similar securities
industry professionals participating in any distribution, to the same extent as
provided above, with respect to information such persons so furnished in
writing expressly for inclusion in the Registration Statement.

                 d.       Promptly after receipt by an Indemnified Person or
Indemnified Party under this Section 6 of notice of the commencement of any
action or proceeding (including any governmental action or proceeding)
involving a Claim, such Indemnified Person or Indemnified Party shall, if a
Claim in respect thereof is to be made against any indemnifying party under
this Section 6, deliver to the indemnifying party a written notice of the
commencement thereof, and the indemnifying party shall have the right to
participate in, and, to the extent the indemnifying party so desires, jointly
with any other indemnifying party similarly noticed, to assume control of the
defense thereof with counsel mutually satisfactory to the indemnifying party
and the Indemnified Person or the Indemnified Party, as the case may be;
provided, however, that an Indemnified Person or Indemnified Party shall have
the right to retain its own counsel with the fees and expenses to be paid by
the indemnifying party, if, in the reasonable opinion of counsel retained by
the indemnifying party, the representation by such counsel of the Indemnified
Person or Indemnified Party and the indemnifying party would be inappropriate
due to actual or potential differing interests between such Indemnified Person
or Indemnified Party and any other party represented by such counsel in such
proceeding.  The Company shall pay reasonable fees for only one separate legal
counsel for the Investors, and such legal counsel shall be selected by the
Investors holding a majority in interest of the Registrable Securities included
in the Registration Statement to which the Claim relates.  The Indemnified
Party or Indemnified Person shall cooperate fully with the indemnifying party
in connection with any negotiation or defense of any such action or claim by
the indemnifying party and shall furnish to the indemnifying party all
information reasonably available to the Indemnified Party or Indemnified Person
which relates to such action or claim.  The indemnifying party shall keep the
Indemnified Party or Indemnified Person fully apprised at all times as to the
status of the defense or any settlement negotiations with respect thereto.  No
indemnifying party shall be liable for any settlement of any action, claim or
proceeding effected without its written consent, provided, however, that the
indemnifying party shall not unreasonably withhold, delay or condition its
consent.  No indemnifying party shall, without the consent of the Indemnified
Party or Indemnified Person, consent to entry of any judgment or enter into any
settlement or other compromise which does not include as an unconditional term
thereof the giving by the claimant or plaintiff to such Indemnified Party or
Indemnified Person of a release from all liability in respect to such claim or
litigation.  Following indemnification as provided for hereunder, the
indemnifying party shall be subrogated to all rights of the Indemnified Party
or Indemnified Person with respect to all





                                      -12-
<PAGE>   13
third parties, firms or corporations relating to the matter for which
indemnification has been made.  The failure to deliver written notice to the
indemnifying party within a reasonable time of the commencement of any such
action shall not relieve such indemnifying party of any liability to the
Indemnified Person or Indemnified Party under this Section 6, except to the
extent that the indemnifying party is prejudiced in its ability to defend such
action.

                 e.       The indemnification required by this Section 6 shall
be made by periodic payments of the amount thereof during the course of the
investigation or defense, as and when bills are received or Indemnified Damages
are incurred.

                 f.       The indemnity agreements contained herein shall be in
addition to (i) any cause of action or similar right of the Indemnified Party
or Indemnified Person against the indemnifying party or others, and (ii) any
liabilities the indemnifying party may be subject to pursuant to the law.

         7.      CONTRIBUTION.

                 To the extent any indemnification by an indemnifying party is
prohibited or limited by law, the indemnifying party agrees to make the maximum
contribution with respect to any amounts for which it would otherwise be liable
under Section 6 to the fullest extent permitted by law; provided, however,
that:  (i) no contribution shall be made under circumstances where the maker
would not have been liable for indemnification under the fault standards set
forth in Section 6; (ii) no seller of Registrable Securities guilty of
fraudulent misrepresentation (within the meaning of Section 11(f) of the 1933
Act) shall be entitled to contribution from any seller of Registrable
Securities who was not guilty of fraudulent misrepresentation; and (iii)
contribution by any seller of Registrable Securities shall be limited in amount
to the net amount of proceeds received by such seller from the sale of such
Registrable Securities.

         8.      REPORTS UNDER THE 1934 ACT.

                 With a view to making available to the Investors the benefits
of Rule 144 promulgated under the 1933 Act or any other similar rule or
regulation of the SEC that may at any time permit the investors to sell
securities of the Company to the public without registration ("RULE 144"), the
Company agrees to:

                 a.       make and keep public information available, as those
terms are understood and defined in Rule 144;

                 b.       file with the SEC in a timely manner all reports and
other documents required of the Company under the 1933 Act and the 1934 Act so
long as the Company remains subject to such requirements (it being understood
that nothing herein shall limit the Company's obligations under Section 4(c) of
the Securities Purchase Agreement) and the filing of such reports and other
documents is required for the applicable provisions of Rule 144; and

                 c.       furnish to each Investor so long as such Investor
owns Registrable Securities, promptly upon request, (i) a written statement by
the Company that it has complied





                                      -13-
<PAGE>   14
with the reporting requirements of Rule 144, the 1933 Act and the 1934 Act,
(ii) a copy of the most recent annual or quarterly report of the Company and
such other reports and documents so filed by the Company, and (iii) such other
information as may be reasonably requested to permit the investors to sell such
securities pursuant to Rule 144 without registration.

         9.      ASSIGNMENT OF REGISTRATION RIGHTS.

                 The rights to have the Company register Registrable Securities
pursuant to this Agreement shall be automatically assignable by the Investors
to any transferee of all or any portion of Registrable Securities if: (i) the
Investor agrees in writing with the transferee or assignee to assign such
rights, and a copy of such agreement is furnished to the Company within a
reasonable time after such assignment; (ii) the Company is, within a reasonable
time after such transfer or assignment, furnished with written notice of (a)
the name and address of such transferee or assignee, and (b) the securities
with respect to which such registration rights are being transferred or
assigned; (iii) immediately following such transfer or assignment the further
disposition of such securities by the transferee or assignee is restricted
under the 1933 Act and applicable state securities laws; (iv) at or before the
time the Company receives the written notice contemplated by clause (ii) of
this sentence the transferee or assignee agrees in writing with the Company to
be bound by all of the provisions contained herein; (v) such transfer shall
have been made in accordance with the applicable requirements of the Securities
Purchase Agreement; (vi) such transferee shall be an "accredited investor" as
that term is defined in Rule 501 of Regulation D promulgated under the 1933
Act; and (vii) in the event the assignment occurs subsequent to the date of
effectiveness of the Registration Statement required to be filed pursuant to
Section 2(a), the transferee agrees to pay all reasonable expenses of amending
or supplementing such Registration Statement to reflect such assignment.

         10.     AMENDMENT OF REGISTRATION RIGHTS.

                 Provisions of this Agreement may be amended and the observance
thereof may be waived (either generally or in a particular instance and either
retroactively or prospectively), only with the written consent of the Company
and Investors who hold two-thirds (2/3) of the Registrable Securities.  Any
amendment or waiver effected in accordance with this Section 10 shall be
binding upon each Investor and the Company.

         11.     MISCELLANEOUS.

                 a.       A person or entity is deemed to be a holder of
Registrable Securities whenever such person or entity owns of record such
Registrable Securities.  If the Company receives conflicting instructions,
notices or elections from two or more persons or entities with respect to the
same Registrable Securities, the Company shall act upon the basis of
instructions, notice or election received from the registered owner of such
Registrable Securities.

                 b.       Any notices consents, waivers or other communications
required or permitted to be given under the terms of this Agreement must be in
writing and will be deemed to have been delivered (i) upon receipt, when
delivered personally; (ii) upon receipt, when sent by facsimile, provided a
copy is mailed by U.S. certified mail, return receipt requested; (iii) three
(3) days after being sent by U.S.  certified mail, return receipt requested, or
(d) one (1) day





                                      -14-
<PAGE>   15
after deposit with a nationally recognized overnight delivery service, in each
case properly addressed to the party to receive the same.  The addresses and
facsimile numbers for such communications shall be:

                 if to the Company:

                          166 Baypointe Parkway
                          San Jose, California  95134
                          Telephone:  (408) 468-1800
                          Facsimile:  (408) 468-1619
                          Attention:  President

                 with a copy to:

                          Cooley Godward LLP
                          3000 El Camino Real
                          5 Palo Alto Square
                          Palo Alto, California  94306
                          Telephone:  (415) 843-5000
                          Facsimile:  (415) 857-0663
                          Attention:  Andrei Manoliu

                 if to a Buyer, to its address and facsimile number on Schedule
                 A attached hereto, with copies to such Buyer's counsel as set
                 forth on Schedule A.

         Each party shall provide five (5) days prior notice to the other party
of any change in address, phone number or facsimile number.

                 c.       Failure of any party to exercise any right or remedy
under this Agreement or otherwise, or delay by a party in exercising such right
or remedy, shall not operate as a waiver thereof.

                 d.       This Agreement shall be governed by and interpreted
in accordance with the laws of the State of California without regard to the
principles of conflict of laws.  If any provision of this Agreement shall be
invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

                 e.       This Agreement and the Securities Purchase Agreement
constitute the entire agreement among the parties hereto with respect to the
subject matter hereof and thereof.  There are no restrictions, promises,
warranties or undertakings, other than those set forth or referred to herein
and therein.  This Agreement and the Securities Purchase Agreement supersede
all prior agreements and understandings among the parties hereto with respect
to the subject matter hereof and thereof.





                                      -15-
<PAGE>   16
                 f.       Subject to the requirements of Section 9, this
Agreement shall inure to the benefit of and be binding upon the permitted
successors and assigns of each of the parties hereto.

                 g.       The headings in this Agreement are for convenience of
reference only and shall not limit or otherwise affect the meaning hereof.

                 h.       This Agreement may be executed in two or more
identical counterparts, each of which shall be deemed an original but all of
which shall constitute one and the same agreement.  This Agreement, once
executed by a party, may be delivered to the other party hereto by facsimile
transmission of a copy of this Agreement bearing the signature of the party so
delivering this Agreement.

                 i.       Each party shall do and perform, or cause to be done
and performed, all such further acts and things, and shall execute and deliver
all such other agreements, certificates, instruments and documents, as the
other party may reasonably request in order to carry out the intent and
accomplish the purposes of this Agreement and the consummation of the
transactions contemplated hereby.





                                      -16-
<PAGE>   17
         IN WITNESS WHEREOF, the parties have caused this Registration Rights
Agreement to be duly executed as of day and year first above written.




COMPANY:                               BUYERS:

JTS CORPORATION                        NELSON PARTNERS


By:                                    By: 
   --------------------------             -----------------------------
Name:      David T. Mitchell           Name:     Anne Dupuy
Its:       President and               Its:      Officer
           Chief Executive Officer


                                       OLYMPUS SECURITIES, LTD.


                                       By:
                                          ----------------------------
                                       Name: Anne Dupuy
                                       Its:  Alternate Director


                                       RGC INTERNATIONAL INVESTORS, LDC

                                       By:   Rose Glen Capital Management, L.P.,
                                             as Investment Manager

                                       By:   RGC General Partners Corp.,
                                             as General Partner


                                       By:
                                          ----------------------------
                                       Name:  Wayne Bloch
                                       Its:   Managing Director


                                       CAPITAL VENTURES INTERNATIONAL

                                       By:    Bala International, Inc.,
                                              as agent

                                       By:
                                          ----------------------------
                                       Name:  Andrew Frost
                                       Its:   Director
<PAGE>   18
                                   SCHEDULE A

                                     BUYERS


<TABLE>
<CAPTION>
                                          Investor Address                    Investor's Legal Counsel
     Investor Name                      and Facsimile Number                   and Counsel's Address
- ----------------------             -------------------------------          ---------------------------------
<S>                                <C>                                      <C>
Nelson Partners                    c/oLeeds Management Services             Citadel Investment Group, L.L.C.
                                   129 Front Street, 5th Floor              225 West Washington Street
                                   Hamilton HM12 Bermuda                    Chicago, Illinois 60606
                                   Attn:  Anne Dupuy                        Attention: Kenneth C. Griffin
                                   Facsimile: (441) 292-2239                         Kenneth A. Simpler
                                                                            Facsimile: (312) 368-1348
                                                                            Katten Muchin & Zavis
                                                                            525 W. Monroe Street
                                                                            Chicago, Illinois 60661-3693
                                                                            Attention: Matthew S. Brown, Esq.
                                                                                     Robert J. Brantman, Esq.
                                                                            Facsimile: (312) 902-1061

Olympus Securities, Ltd.           c/oLeeds Management Services             Citadel Investment Group, L.L.C.
                                   129 Front Street, 5th Floor              225 West Washington Street
                                   Hamilton HM12 Bermuda                    Chicago, Illinois 60606
                                   Attn:  Anne Dupuy                        Attention: Kenneth C. Griffin
                                   Facsimile: (441) 292-2239                         Kenneth A. Simpler
                                                                            Facsimile: (312) 368-1348

                                                                            Katten Muchin & Zavis
                                                                            525 W. Monroe Street
                                                                            Chicago, Illinois 60661-3693
                                                                            Attention: Matthew S. Brown, Esq.
                                                                                     Robert J. Brantman, Esq.
                                                                            Facsimile: (312) 902-1061

RGC International Investors,       c/o Rose Glen Capital Management,
LDC                                L.P.
                                   440 East Swedesford Road
                                   Suite 2025
                                   Wayne, Pennsylvania  19087
                                   Attn:  Wayne Bloch
                                   Facsimile: (610) 971-2212
                                   Residency:  Cayman Islands

Capital Ventures International     c/o Bala International Inc.
                                   401 City Avenue
                                   Bala Cynwyd, Pennsylvania 19004
                                   Attn: Michael Spolan
                                   Facsimile: (610) 617-2707
                                   Residency:  Cayman Islands
</TABLE>

<PAGE>   1
                                                                   Exhibit 5.1



                                       ATTORNEYS AT LAW        San Francisco, CA
                                                               415 693-2000

                                       Five Palo Alto Square   Menlo Park, CA
                                       3000 El Camino Real     415 843-5000
                                       Palo Alto, CA           
                                       94306-2155              San Diego, CA
                                       Main 415 843-5000       619 550-6000
                                       Fax  415 857-0663       
                                                               Boulder, CO
                                                               303 546-4000
February 14, 1997                      http://www.cooley.com
                                                               Denver, CO
                                                               303 606-4800
                                       ANDREI M. MANOLIU
                                       415 843-5048
JTS Corporation                        [email protected]
166 Baypointe Parkway
San Jose, CA 95134


Ladies and Gentlemen:

You have requested our opinion with respect to certain matters in connection
with the filing on February 14, 1997 by JTS Corporation (the "Company") of a
Registration Statement on Form S-1 (the "Registration Statement") with the
Securities and Exchange Commission, with respect to the offer and sale of
56,392,046 shares of the Company's Common Stock, $.001 par value (the "Common
Stock").

In connection with this opinion, we have examined and relied upon the
Registration Statement, the Company's Certificate of Incorporation, as amended,
and Bylaws, and the originals or copies certified to our satisfaction of such
records, documents, certificates, memoranda and other instruments as in our
judgment are necessary or appropriate to enable us to render the opinion
expressed below.

On the basis of the foregoing, and in reliance thereon, we are of the opinion
that the shares of Common Stock, when sold and issued in accordance with the
terms of the Registration Statement and Related Prospectus will be validly
issued, fully paid and nonassessable.

We consent to the reference to our firm under the caption "Legal Matters" in
the Registration Statement and to the filing of this opinion as an exhibit to
the Registration Statement.

Very truly yours,

Cooley Godward LLP



By: /s/ ANDREI M. MANOLIU
    -------------------------
        Andrei M. Manoliu

AMM:db

<PAGE>   1

                                                                   EXHIBIT 10.37


                         SECURITIES PURCHASE AGREEMENT


         SECURITIES PURCHASE AGREEMENT (the "AGREEMENT"), dated as of January
22, 1997, by and among JTS Corporation, a Delaware corporation, with
headquarters located at 166 Baypointe Parkway, San Jose, California 95134 (the
"COMPANY"), and the investors listed on the Schedule of Investors attached
hereto (individually, a "BUYER" and collectively, the "BUYERS").

         WHEREAS:

         A.      The Company and the Buyers are executing and delivering this
Agreement in reliance upon the exemption from securities registration afforded
by Rule 506 of Regulation D ("REGULATION D") as promulgated by the United
States Securities and Exchange Commission (the "SEC") under the Securities Act
of 1933, as amended (the "1933 ACT");

         B.      The Company has authorized the following new series of its
Preferred Stock, $.001 par value per share (the "PREFERRED STOCK"): the
Company's Series C Convertible Preferred Stock (the "SERIES C PREFERRED
SHARES"), which shall be convertible into shares of the Company's Common Stock,
$.001 par value per share (the "COMMON STOCK") (as converted, the "CONVERSION
SHARES"), in accordance with the terms of the Company's Certificate of
Designations, Preferences and Rights of the Series C Preferred Shares,
substantially in the form attached hereto as Exhibit A (the "CERTIFICATE OF
DESIGNATIONS");

         C.      The Buyers wish to purchase, upon the terms and conditions
stated in this Agreement, an aggregate of up to 25,000 shares of the Series C
Preferred Shares in the respective amounts set forth opposite each Buyer's name
on the Schedule of Investors; and

         D.      Contemporaneously with the execution and delivery of this
Agreement, the parties hereto are executing and delivering a Registration
Rights Agreement substantially in the form attached hereto as Exhibit B (the
"REGISTRATION RIGHTS AGREEMENT") pursuant to which the Company has agreed to
provide certain registration rights under the 1933 Act and the rules and
regulations promulgated thereunder, and applicable state securities laws.

         NOW THEREFORE, the Company and the Buyers hereby agree as follows:

         1.      PURCHASE AND SALE OF SERIES C PREFERRED SHARES.

                 a.       Purchase of Series C Preferred Shares.  Subject to
the satisfaction (or waiver) of the conditions set forth in Sections 6 and 7
below, the Company shall issue and sell to the Buyers and the Buyers shall
purchase from the Company an aggregate of 25,000 Series C Preferred Shares, in
the respective amounts set forth opposite each Buyer's name on the Schedule of
Investors (the "CLOSING").  The per share purchase price (the "PURCHASE PRICE")
of the Series C Preferred Shares shall be $1,000.00.
<PAGE>   2
                 b.       Closing Date.  The date and time of the Closing (the
"CLOSING DATE") shall be 10:00 a.m. Central Standard Time, within five (5)
business days following the date hereof, subject to notification of
satisfaction (or waiver) of the conditions to the Closing set forth in Sections
6 and 7 below (or such later date as is mutually agreed to by the Company and
the Buyers).  The Closing shall occur on the Closing Date at the offices of
Katten Muchin & Zavis, 525 West Monroe Street, Suite 1600, Chicago, Illinois
60661-3693.

                 c.       Form of Payment.  On the Closing Date, (i) each Buyer
shall pay the Purchase Price to the Company for the Series C Preferred Shares
to be issued and sold to such Buyer at the Closing, by wire transfer of
immediately available funds in accordance with the Company's written wire
instructions, and (ii) the Company shall deliver to each Buyer, a stock
certificate representing such number of the Series C Preferred Shares which
such Buyer is then purchasing (as indicated opposite such Buyer's name on the
Schedule of Investors), duly executed on behalf of the Company and registered
in the name of such Buyer or its designee (the "STOCK CERTIFICATES").

         2.      BUYER'S REPRESENTATIONS AND WARRANTIES.

                 Each Buyer represents and warrants with respect to only itself
that:

                 a.       Investment Purpose.  Such Buyer (i) is acquiring the
Series C Preferred Shares and (ii) upon conversion of the Series C Preferred
Shares, will acquire the Conversion Shares then issuable, for its own account
for investment only and not with a view towards, or for resale in connection
with, the public sale or distribution thereof, except pursuant to sales
registered or exempted under the 1933 Act; provided, however, that by making
the representations herein, such Buyer does not agree to hold the Series C
Preferred Shares for any minimum or other specific term and reserves the right
to dispose of the Series C Preferred Shares at any time in accordance with or
pursuant to a registration statement or an exemption under the 1933 Act.

                 b.       Accredited Investor Status.  Such Buyer is an
"accredited investor" as that term is defined in Rule 501(a)(3) of Regulation
D.

                 c.       Reliance on Exemptions.  Such Buyer understands that
the Series C Preferred Shares and the Conversion Shares are being offered and
sold to it in reliance on specific exemptions from the registration
requirements of United States federal and state securities laws and that the
Company is relying in part upon the truth and accuracy of, and such Buyer's
compliance with, the representations, warranties, agreements, acknowledgments
and understandings of such Buyer set forth herein in order to determine the
availability of such exemptions and the eligibility of such Buyer to acquire
the Series C Preferred Shares and the Conversion Shares.

                 d.       Information.  Such Buyer and its advisors, if any,
have been furnished with all materials relating to the business, finances and
operations of the Company and materials relating to the offer and sale of the
Series C Preferred Shares and the Conversion Shares which have been requested
by such Buyer.  Such Buyer and its advisors, if any, have been afforded the
opportunity to ask questions of the Company.  Neither such inquiries nor any
other due





                                      -2-
<PAGE>   3
diligence investigations conducted by such Buyer or its advisors, if any, or
its representatives shall modify, amend or affect such Buyer's right to rely on
the Company's representations and warranties contained in Section 3 below.
Such Buyer understands that its investment in the Series C Preferred Shares and
the Conversion Shares involves a high degree of risk.  Such Buyer has sought
such accounting, legal and tax advice as it has considered necessary to make an
informed investment decision with respect to its acquisition of the Series C
Preferred Shares and the Conversion Shares.

                 e.       No Governmental Review.  Such Buyer understands that
no United States federal or state agency or any other government or
governmental agency has passed on or made any recommendation or endorsement of
the Series C Preferred Shares or the Conversion Shares or the fairness or
suitability of the investment in the Series C Preferred Shares or the
Conversion Shares nor have such authorities passed upon or endorsed the merits
of the offering of the Series C Preferred Shares or the Conversion Shares.

                 f.       Transfer or Resale.  Such Buyer understands that
except as provided in the Registration Rights Agreement: (i) the Series C
Preferred Shares and the Conversion Shares have not been and are not being
registered under the 1933 Act or any state securities laws, and may not be
offered for sale, sold, assigned or transferred unless (A) subsequently
registered thereunder, (B) such Buyer shall have delivered to the Company an
opinion of counsel, in a generally acceptable form, to the effect that such
securities to be sold, assigned or transferred may be sold, assigned or
transferred pursuant to an exemption from such registration, or (C) such Buyer
provides the Company with reasonable assurance that such securities can be
sold, assigned or transferred pursuant to Rule 144 promulgated under the 1933
Act (or a successor rule thereto); (ii) any sale of such securities made in
reliance on Rule 144 promulgated under the 1933 Act (or a successor rule
thereto) ("RULE 144") may be made only in accordance with the terms of Rule 144
and further, if Rule 144 is not applicable, any resale of such securities under
circumstances in which the seller (or the person through whom the sale is made)
may be deemed to be an underwriter (as that term is defined in the 1933 Act)
may require compliance with some other exemption under the 1933 Act or the
rules and regulations of the SEC thereunder; and (iii) neither the Company nor
any other person is under any obligation to register such securities under the
1933 Act or any state securities laws or to comply with the terms and
conditions of any exemption thereunder.

                 g.       Legends.  Such Buyer understands that the
certificates or other instruments representing the Series C Preferred Shares
and, until such time as the sale of the Conversion Shares have been registered
under the 1933 Act as contemplated by the Registration Rights Agreement, the
stock certificates representing the Conversion Shares, shall bear a restrictive
legend in substantially the following form (and a stop-transfer order may be
placed against transfer of such stock certificates):

         THE SECURITIES REPRESENTED BY THIS CERTIFICATE HAVE NOT BEEN
         REGISTERED UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
         STATE SECURITIES LAWS.  THE SECURITIES HAVE BEEN ACQUIRED FOR
         INVESTMENT AND MAY NOT BE OFFERED FOR SALE, SOLD, TRANSFERRED OR
         ASSIGNED IN THE ABSENCE OF AN EFFECTIVE REGISTRATION STATEMENT FOR THE





                                      -3-
<PAGE>   4
         SECURITIES UNDER THE SECURITIES ACT OF 1933, AS AMENDED, OR APPLICABLE
         STATE SECURITIES LAWS, OR AN OPINION OF COUNSEL, IN A GENERALLY
         ACCEPTABLE FORM, THAT REGISTRATION IS NOT REQUIRED UNDER SAID ACT OR
         APPLICABLE STATE SECURITIES LAWS OR UNLESS SOLD PURSUANT TO RULE 144
         UNDER SAID ACT.

The legend set forth above shall be removed and the Company shall issue a
certificate without such legend to the holder of the Series C Preferred Shares
or the Conversion Shares upon which it is stamped, if, unless otherwise
required by state securities laws, (i) the sale of the Conversion Shares is
registered under the 1933 Act, (ii) in connection with a sale transaction, such
holder provides the Company with an opinion of counsel, in a generally
acceptable form, to the effect that a public sale, assignment or transfer of
the Series C Preferred Shares or the Conversion Shares may be made without
registration under the 1933 Act, or (iii) such holder provides the Company with
reasonable assurances that the Series C Preferred Share or the Conversion
Shares can be sold pursuant to Rule 144 without any restriction as to the
number of securities acquired as of a particular date that can then be
immediately sold.  Such Buyer agrees to sell the Conversion Shares, including
those represented by certificate(s) from which the legend has been removed, in
compliance with all applicable securities laws, including any prospectus
delivery requirements.

                 h.       Authorization; Enforcement.  This Agreement has been
duly and validly authorized, executed and delivered on behalf of such Buyer and
is a valid and binding agreement of such Buyer enforceable in accordance with
its terms, subject as to enforceability to general principles of equity and to
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation and
other similar laws relating to, or affecting generally, the enforcement of
applicable creditors' rights and remedies.

                 i.       Residency.  Such Buyer is a resident of that country
specified in its address on the Schedule of Investors.

         3.      REPRESENTATIONS AND WARRANTIES OF THE COMPANY.

                 The Company represents and warrants to each of the Buyers
that:

                 a.       Organization and Qualification.  The Company and its
significant subsidiaries (as defined in Rule 1-02(w) of Regulation S-X
promulgated by the SEC under the 1933 Act and which are set forth in Schedule
3(a)) are corporations duly organized and validly existing in good standing
under the laws of the jurisdiction in which they are incorporated, and have the
requisite corporate power to own their properties and to carry on their
business as now being conducted.  Each of the Company and its subsidiaries is
duly qualified as a foreign corporation to do business and is in good standing
in every jurisdiction in which the nature of the business conducted by it makes
such qualification necessary, except to the extent that the failure to be so
qualified or be in good standing would not have a material adverse effect on
the Company and its subsidiaries taken as a whole.

                 b.       Authorization; Enforcement; Compliance with Other
Instruments.  (i) The Company has the requisite corporate power and authority
to enter into and perform this





                                      -4-
<PAGE>   5
Agreement and the Registration Rights Agreement, and to issue the Series C
Preferred Shares and the Conversion Shares in accordance with the terms hereof
and thereof, (ii) the execution and delivery of this Agreement and the
Registration Rights Agreement by the Company and the consummation by it of the
transactions contemplated hereby and thereby, including without limitation the
issuance of the Series C Preferred Shares and the reservation for issuance and
the issuance of the Conversion Shares issuable upon conversion thereof, have
been duly authorized by the Company's Board of Directors and no further consent
or authorization is required by the Company, its Board of Directors or its
stockholders, (iii) this Agreement and the Registration Rights Agreement have
been duly executed and delivered by the Company, (iv) this Agreement and the
Registration Rights Agreement constitute the valid and binding obligations of
the Company enforceable against the Company in accordance with their terms,
except as such enforceability may be limited by general principles of equity or
applicable bankruptcy, insolvency, reorganization, moratorium, liquidation or
similar laws relating to, or affecting generally, the enforcement of creditors'
rights and remedies, and (v) prior to the Closing Date, the Certificate of
Designations has been filed with the Secretary of State of the State of
Delaware and will be in full force and effect, enforceable against the Company
in accordance with its terms.

                 c.       Capitalization.  As of the date hereof, the
authorized capital stock of the Company consists of 150,000,000 shares of
Common Stock, of which as of January 14, 1997, 104,756,027 shares were issued
and outstanding, and 10,000,000 shares of Preferred Stock, of which as of
January 15, 1997, 15,000 shares were issued and outstanding.  All of such
outstanding shares have been validly issued and are fully paid and
nonassessable.  Except as disclosed in Schedule 3(c), no shares of Common Stock
or Preferred Stock are subject to preemptive rights or any other similar rights
or any liens or encumbrances suffered or permitted by the Company.  Except as
disclosed in Schedule 3(c), as of the effective date of this Agreement, (i)
there are no outstanding options, warrants, scrip, rights to subscribe to,
calls or commitments of any character whatsoever relating to, or securities or
rights convertible into, any shares of capital stock of the Company or any of
its subsidiaries, or contracts, commitments, understandings or arrangements by
which the Company or any of its subsidiaries is or may become bound to issue
additional shares of capital stock of the Company or any of its subsidiaries or
options, warrants, scrip, rights to subscribe to, calls or commitments of any
character whatsoever relating to, or securities or rights convertible into, any
shares of capital stock of the Company or any of its subsidiaries, (ii) there
are no outstanding debt securities and (iii) there are no agreements or
arrangements under which the Company or any of its subsidiaries is obligated to
register the sale of any of their securities under the 1933 Act (except the
Registration Rights Agreement).  There are no securities or instruments
containing anti-dilution or similar provisions that will be triggered by the
issuance of the Series C Preferred Shares or the Conversion Shares as described
in this Agreement.  The Company has furnished to the Buyer true and correct
copies of the Company's Certificate of Incorporation, as amended and as in
effect on the date hereof (the "CERTIFICATE OF INCORPORATION"), and the
Company's By-laws, as in effect on the date hereof (the "BY-LAWS"), and the
terms of all securities convertible into or exercisable for Common Stock and
the material rights of the holders thereof in respect thereto.

                 d.       Issuance of Securities.  The Series C Preferred
Shares are duly authorized and, upon issuance in accordance with the terms
hereof, shall be (i) validly issued, fully paid





                                      -5-
<PAGE>   6
and non-assessable, (ii) free from all taxes, liens and charges with respect to
the issue thereof and (iii) entitled to the rights and preferences set forth in
the Certificate of Designations.  The Conversion Shares issuable upon
conversion of the Series C Preferred Shares have been duly authorized and
reserved for issuance and upon conversion or exercise in accordance with the
Certificate of Designations will be validly issued, fully paid and
nonassessable and free from all taxes, liens and charges with respect to the
issue thereof, with the holders being entitled to all rights accorded to a
holder of Common Stock.

                 e.       No Conflicts.  Except as disclosed in Schedule 3(e),
the execution, delivery and performance of this Agreement by the Company and
the consummation by the Company of the transactions contemplated hereby will
not (i) result in a violation of the Certificate of Incorporation or By-laws or
(ii) conflict with, or constitute a default (or an event which with notice or
lapse of time or both would become a default) under, or give to others any
rights of termination, amendment, acceleration or cancellation of, any material
agreement, indenture or instrument to which the Company or any of its
subsidiaries is a party, or result in a violation of any law, rule, regulation,
order, judgment or decree (including federal and state securities laws and
regulations and the rules and regulations of the principal market or exchange
on which the Common Stock is traded or listed) applicable to the Company or any
of its subsidiaries or by which any property or asset of the Company or any of
its subsidiaries is bound or affected.  Except as disclosed in Schedule 3(e),
neither the Company nor its subsidiaries is in violation of any term of or in
default under its Certificate of Incorporation or By-laws or their
organizational charter or by-laws, respectively, or any material contract,
agreement, mortgage, indebtedness, indenture, instrument, judgment, decree or
order or any statute, rule or regulation applicable to the Company or its
subsidiaries.  The business of the Company and its subsidiaries is not being
conducted, and shall not be conducted so long as the Buyers hold any Series C
Preferred Shares or Conversion Shares, in violation of any law, ordinance,
regulation of any governmental entity.  Except as specifically contemplated by
this Agreement and as required under the 1933 Act and any applicable state
securities laws, the Company is not required to obtain any consent,
authorization or order of, or make any filing or registration with, any court
or governmental agency in order for it to execute, deliver or perform any of
its obligations under or contemplated by this Agreement or the Registration
Rights Agreement in accordance with the terms hereof or thereof.  Except as
disclosed in Schedule 3(e), all consents, authorizations, orders, filings and
registrations which the Company is required to obtain pursuant to the preceding
sentence have been obtained or effected on or prior to the date hereof.  The
Company and its subsidiaries are unaware of any facts or circumstances which
might give rise to any of the foregoing.

                 f.       SEC Documents; Financial Statements.  Since July 31,
1996, the Company has filed all reports, schedules, forms, statements and other
documents required to be filed by it with the SEC pursuant to the reporting
requirements of the Securities Exchange Act of 1934, as amended (the "1934
ACT") (all of the foregoing filed prior to the date hereof and all exhibits
included therein and financial statements and schedules thereto and documents
incorporated by reference therein and the Company's Registration Statements on
Form S-4 filed on June 24, 1996, as amended, and on Form S-1 filed on November
29, 1996 and all exhibits included therein and financial statements and
schedules thereto and documents incorporated by reference therein, being
hereinafter referred to as the "SEC DOCUMENTS").  The Company has delivered to
the Buyer or its representative true and complete copies of the SEC Documents.
As of their respective dates, the SEC Documents complied in all material
respects with the requirements of





                                      -6-
<PAGE>   7
the 1934 Act and the rules and regulations of the SEC promulgated thereunder
applicable to the SEC Documents, and none of the SEC Documents, at the time
they were filed with the SEC, contained any untrue statement of a material fact
or omitted to state a material fact required to be stated therein or necessary
in order to make the statements therein, in light of the circumstances under
which they were made, not misleading.  As of their respective dates, the
financial statements of the Company included in the SEC Documents complied as
to form in all material respects with applicable accounting requirements and
the published rules and regulations of the SEC with respect thereto.  Such
financial statements have been prepared in accordance with generally accepted
accounting principles, consistently applied, during the periods involved
(except (i) as may be otherwise indicated in such financial statements or the
notes thereto, or (ii) in the case of unaudited interim statements, to the
extent they may exclude footnotes or may be condensed or summary statements)
and fairly present in all material respects the financial position of the
Company as of the dates thereof and the results of its operations and cash
flows for the periods then ended (subject, in the case of unaudited statements,
to normal year-end audit adjustments).  No other information provided by or on
behalf of the Company to the Buyer which is not included in the SEC Documents,
including, without limitation, information referred to in Section 2(d) of this
Agreement, contains any untrue statement of a material fact or omits to state
any material fact necessary in order to make the statements therein, in the
light of the circumstance under which they are or were made, not misleading.

                 g.       Absence of Certain Changes.  Except as disclosed in
Schedule 3(g), since October 27, 1996 there has been no material adverse change
and no material adverse development in the business, properties, operations,
financial condition, results of operations or prospects of the Company or its
subsidiaries.  The Company has not taken any steps, and does not currently
expect to take any steps, to seek protection pursuant to any bankruptcy law nor
does the Company or its subsidiaries have any knowledge or reason to believe
that its creditors intend to initiate involuntary bankruptcy proceedings.

                 h.       Absence of Litigation.     There is no action, suit,
proceeding, inquiry or investigation before or by any court, public board,
government agency, self-regulatory organization or body pending or, to the
knowledge of the Company or any of its subsidiaries, threatened against or
affecting the Company, the Common Stock or any of the Company's subsidiaries,
wherein an unfavorable decision, ruling or finding would (i) have a material
adverse effect on the transactions contemplated hereby (ii) adversely affect
the validity or enforceability of, or the authority or ability of the Company
to perform its obligations under, this Agreement or any of the documents
contemplated herein or (iii), except as expressly set forth in the SEC
Documents or in Schedule 3(h), have a material adverse effect on the business,
operations, properties, financial condition or results of operation of the
Company and its subsidiaries taken as a whole.

                 i.       Acknowledgement Regarding Buyers' Purchase of Series
C Preferred Shares.  The Company acknowledges and agrees that each of the
Buyers is acting solely in the capacity of arm's length purchaser with respect
to this Agreement and the transactions contemplated hereby.  The Company
further acknowledges that each Buyer is not acting as a financial advisor or
fiduciary of the Company (or in any similar capacity) with respect to this
Agreement and the transactions contemplated hereby and any advice given by any
of the Buyers or any of their respective representatives or agents in
connection with this Agreement and the





                                      -7-
<PAGE>   8
transactions contemplated hereby is merely incidental to such Buyer's purchase
of the Series C Preferred Shares or the Conversion Shares.  The Company further
represents to each Buyer that the Company's decision to enter into this
Agreement has been based solely on the independent evaluation by the Company
and its representatives.

                 j.       No Undisclosed Events or Circumstances.  No event or
circumstance has occurred or exists with respect to the Company or its
subsidiaries or their respective business, properties, prospects, operations or
financial condition, which, under applicable law, rule or regulation, was
required to be publicly disclosed or announced by the Company but which has not
been so publicly announced or disclosed.

                 k.       No General Solicitation.  Neither the Company, nor
any of its affiliates, nor any person acting on its or their behalf, has
engaged in any form of general solicitation or general advertising (within the
meaning of Regulation D under the 1933 Act) in connection with the offer or
sale of the Series C Preferred Shares or the Conversion Shares.

                 l.       No Integrated Offering.  Neither the Company, nor any
of its affiliates, nor any person acting on its or their behalf has, directly
or indirectly, made any offers or sales of any security or solicited any offers
to buy any security, under circumstances that would require registration of the
Series C Preferred Shares or the Conversion Shares under the 1933 Act or cause
this offering of Series C Preferred Shares and Conversion Shares to be
integrated with prior offerings by the Company for purposes of the 1933 Act or
the stockholder approval provisions of the rules and regulations of The
American Stock Exchange, Inc. ("AMEX").

                 m.       Employee Relations.  Neither the Company nor any of
its subsidiaries is involved in any union labor dispute nor, to the knowledge
of the Company or any of its subsidiaries, is any such dispute threatened. None
of the Company's or its subsidiaries' employees is a member of a union and the
Company and its subsidiaries believe that their relations with their employees
are good.

                 n.       Intellectual Property Rights.  The Company and its
subsidiaries own or possess adequate rights or licenses to use all trademarks,
trade names, service marks, service mark registrations, service names, patents,
patent rights, copyrights, inventions, licenses, approvals, governmental
authorizations, trade secrets and rights necessary to conduct their respective
businesses as now conducted.  Except as set forth on Schedule 3(n), none of the
Company's trademarks, trade names, service marks, service mark registrations,
service names, patents, patent rights, copyrights, inventions, licenses,
approvals, government authorizations, trade secrets or other intellectual
property rights have expired or terminated, or are expected to expire or
terminate in the near future.  The Company and its subsidiaries do not have any
knowledge of any infringement by the Company or its subsidiaries of trademark,
trade name rights, patents, patent rights, copyrights, inventions, licenses,
service names, service marks, service mark registrations, trade secret or other
similar rights of others, or of any such development of similar or identical
trade secrets or technical information by others and, except as set forth on
Schedule 3(n), there is no claim, action or proceeding being made or brought
against, or to the Company's knowledge, being threatened against, the Company
or its subsidiaries regarding trademark, trade name, patents, patent rights,
invention, copyright, license, service names, service marks, service mark
registrations, trade secret or other





                                      -8-
<PAGE>   9
infringement; and the Company and its subsidiaries are unaware of any facts or
circumstances which might give rise to any of the foregoing.  The Company and
its subsidiaries have taken reasonable security measures to protect the
secrecy, confidentiality and value of all of their intellectual properties.

                 o.       Environmental Laws.  The Company and its subsidiaries
are (i) in compliance with any and all applicable foreign, federal, state and
local laws and regulations relating to the protection of human health and
safety, the environment or hazardous or toxic substances or wastes, pollutants
or contaminants ("ENVIRONMENTAL LAWS"), (ii) have received all permits,
licenses or other approvals required of them under applicable Environmental
Laws to conduct their respective businesses and (iii) are in compliance with
all terms and conditions of any such permit, license or approval.

                 p.       Title.  The Company and its subsidiaries have good
and marketable title in fee simple to all real property and good and marketable
title to all personal property owned by them which is material to the business
of the Company and its subsidiaries, in each case free and clear of all liens,
encumbrances and defects except such as are described in Schedule 3(p) or such
as do not materially affect the value of such property and do not interfere
with the use made and proposed to be made of such property by the Company and
its subsidiaries.  Any real property and facilities held under lease by the
Company and its subsidiaries are held by them under valid, subsisting and
enforceable leases with such exceptions as are not material and do not
interfere with the use made and proposed to be made of such property and
buildings by the Company and its subsidiaries.

                 q.       Insurance.  The Company and each of its subsidiaries
are insured by insurers of recognized financial responsibility against such
losses and risks and in such amounts as management of the Company believes to
be prudent and customary in the businesses in which the Company and its
subsidiaries are engaged.  Neither the Company nor any such subsidiary has been
refused any insurance coverage sought or applied for and neither the Company
nor any such subsidiary has any reason to believe that it will not be able to
renew its existing insurance coverage as and when such coverage expires or to
obtain similar coverage from similar insurers as may be necessary to continue
its business at a cost that would not materially and adversely affect the
condition, financial or otherwise, or the earnings, business or operations of
the Company and its subsidiaries, taken as a whole.

                 r.       Regulatory Permits.  The Company and its subsidiaries
possess all certificates, authorizations and permits issued by the appropriate
federal, state or foreign regulatory authorities necessary to conduct their
respective businesses, and neither the Company nor any such subsidiary has
received any notice of proceedings relating to the revocation or modification
of any such certificate, authorization or permit.

                 s.       Internal Accounting Controls.  The Company and each
of its subsidiaries maintain a system of internal accounting controls
sufficient to provide reasonable assurance that (i) transactions are executed
in accordance with management's general or specific authorizations, (ii)
transactions are recorded as necessary to permit preparation of financial
statements in conformity with generally accepted accounting principles and to
maintain asset accountability, (iii) access to assets is permitted only in
accordance with management's general or specific





                                      -9-
<PAGE>   10
authorization and (iv) the recorded accountability for assets is compared with
the existing assets at reasonable intervals and appropriate action is taken
with respect to any differences.

                 t.       No Materially Adverse Contracts, Etc.  Neither the
Company nor any of its subsidiaries is subject to any charter, corporate or
other legal restriction, or any judgment, decree, order, rule or regulation
which in the judgment of the Company's officers has or is expected in the
future to have a material adverse effect on the business, properties,
operations, financial condition, results of operations or prospects of the
Company or its subsidiaries.  Neither the Company nor any of its subsidiaries
is a party to any contract or agreement which in the judgment of the Company's
officers has or is expected to have a material adverse effect on the business,
properties, operations, financial condition, results of operations or prospects
of the Company or its subsidiaries.

                 u.       Tax Status.  Except as set forth on Schedule 3(u),
the Company and each of its subsidiaries has made or filed all federal and
state income and all other tax returns, reports and declarations required by
any jurisdiction to which it is subject (unless and only to the extent that the
Company and each of its subsidiaries has set aside on its books provisions
reasonably adequate for the payment of all unpaid and unreported taxes) and has
paid all taxes and other governmental assessments and charges that are material
in amount, shown or determined to be due on such returns, reports and
declarations, except those being contested in good faith and has set aside on
its books provision reasonably adequate for the payment of all taxes for
periods subsequent to the periods to which such returns, reports or
declarations apply.  There are no unpaid taxes in any material amount claimed
to be due by the taxing authority of any jurisdiction, and the officers of the
Company know of no basis for any such claim.

                 v.       Certain Transactions.  Except as set forth on
Schedule 3(v) and in the SEC Documents and except for arm's length transactions
pursuant to which the Company makes payments in the ordinary course of business
upon terms no less favorable than the Company could obtain from third parties
and other than the grant of stock options disclosed on Schedule 3(c), none of
the officers, directors, or employees of the Company is presently a party to
any transaction with the Company (other than for services as employees,
officers and directors), including any contract, agreement or other arrangement
providing for the furnishing of services to or by, providing for rental of real
or personal property to or from, or otherwise requiring payments to or from any
officer, director or such employee or, to the knowledge of the Company, any
corporation, partnership, trust or other entity in which any officer, director,
or any such employee has a substantial interest or is an officer, director,
trustee or partner.

                 w.       Corporate Existence.  So long as a Buyer beneficially
owns any Series C Preferred Shares, the Company shall maintain its corporate
existence, except in the event of a merger, consolidation or sale of all or
substantially all of the Company's assets, as long as the surviving or
successor entity in such transaction (i) assumes the Company's obligations
hereunder and under the agreements and instruments entered into in connection
herewith and (ii) is a publicly traded corporation whose Common Stock is listed
for trading on AMEX, or the New York Stock Exchange, Inc.

                 x.       Dilutive Effect.  The Company understands and
acknowledges that the number of Conversion Shares issuable upon conversion of
the Series C Preferred Shares will





                                      -10-
<PAGE>   11
increase in certain circumstances.  The Company further acknowledges that its
obligation to issue Conversion Shares upon conversion of the Series C Preferred
Shares in accordance with this Agreement and the Certificate of Designations is
absolute and unconditional regardless of the dilutive effect that such issuance
may have on the ownership interests of other stockholders of the Company.

         4.      COVENANTS.

                 a.       Best Efforts.  Each party shall use its best efforts
timely to satisfy each of the conditions to be satisfied by it as provided in
Sections 6 and 7 of this Agreement.

                 b.       Form D.  The Company agrees to file a Form D with
respect to the Series C Preferred Shares and the Conversion Shares as required
under Regulation D and to provide a copy thereof to each Buyer promptly after
such filing.  The Company shall, on or before the Closing Date, take such
action as the Company shall reasonably determine is necessary to qualify the
Series C Preferred Shares and the Conversion Shares for, or obtain exemption
for the Series C Preferred Shares and the Conversion Shares for, sale to the
Buyers at the Closing pursuant to this Agreement under applicable securities or
"Blue Sky" laws of the states of the United States, and shall provide evidence
of any such action so taken to the Buyers on or prior to the Closing Date.

                 c.       Reporting Status.  Until the earlier of (i) the date
as of which the Investors (as that term is defined in the Registration Rights
Agreement) may sell all of the Conversion Shares without restriction pursuant
to Rule 144(k) promulgated under the 1933 Act (or successor thereto), or (ii)
the date on which (A) the Investors shall have sold all the Conversion Shares
and (B) none of the Series C Preferred Shares is outstanding (the "REGISTRATION
PERIOD"), the Company shall file all reports required to be filed with the SEC
pursuant to the 1934 Act, and the Company shall not terminate its status as an
issuer required to file reports under the 1934 Act even if the 1934 Act or the
rules and regulations thereunder would permit such termination.

                 d.       Use of Proceeds.  The Company will use the proceeds
from the sale of the Series C Preferred Shares for substantially the same
purposes and in substantially the same amounts as indicated in Schedule 4(d).

                 e.       Financial Information.  The Company agrees to send
the following to each Buyer during the Registration Period: (i) within five (5)
days after the filing thereof with the SEC, a copy of its Annual Reports on
Form 10-K, its Quarterly Reports on Form 10-Q and any Current Reports on Form
8-K; (ii) within one (1) day after release thereof, copies of all press
releases issued by the Company or any of its subsidiaries and (iii) copies of
the same notices and other information given to the stockholders of the Company
generally, contemporaneously with the giving thereof to the stockholders.

                 f.       Additional Equity Capital; Right of First Offer.  The
Company agrees that during the period beginning on the date hereof and ending
on, and including, the earlier of (i) May 19, 1997 or (ii) the date on which
seventy-five percent (75%) of the Series C Preferred Shares initially issued
pursuant to this Agreement shall have been converted into Common Stock by the
Buyers, the Company will not, without the prior written consent of the Buyers
holding





                                      -11-
<PAGE>   12
two-thirds (2/3) of the Series C Preferred Shares then outstanding, negotiate
or contract with any party to obtain additional equity financings (including
debt financing with an equity component) in any form ("FUTURE OFFERINGS");
provided, however, that such lock-up right of the Buyers shall not apply to the
Company's issuance of securities pursuant to a firm commitment, underwritten
public offering.  In addition, the Company will not conduct any Future
Offerings during the period beginning on the date hereof and ending one (1)
year after the Closing Date unless it shall have first delivered to each Buyer
or a designee appointed by such Buyer written notice (the "FUTURE OFFERING
NOTICE") describing the proposed Future Offering, including the terms and
conditions thereof, and providing each Buyer an option to purchase up to its
Aggregate Percentage (as defined below), as of the date of delivery of the
Future Offering Notice, in the Future Offering (the limitations referred to in
this sentence are collectively referred to as the "CAPITAL RAISING
LIMITATION").  For purposes of this Section 4(f), "AGGREGATE PERCENTAGE" at any
time with respect to any Buyer shall mean the percentage obtained by dividing
(i) the aggregate number of Conversion Shares issued or issuable, as if a
conversion occurred on such date, upon conversion of the Series C Preferred
Shares initially owned by such Buyer by (ii) the aggregate number of Conversion
Shares issued or issuable, as if a conversion occurred on such date, upon
conversion of the Series C Preferred Shares initially held by the Buyers.  A
Buyer can exercise its option to participate in a Future Offering by delivering
written notice thereof to participate to the Company within three (3) business
days of receipt of a Future Offering Notice, which notice shall state the
quantity of securities being offered in the Future Offering that such Buyer
will purchase, up to its Aggregate Percentage, and that number of securities it
is willing to purchase in excess of its Aggregate Percentage.  In the event the
Buyers fail to elect to fully participate in the Future Offering within the
periods described in this Section 4(f), the Company shall have sixty (60) days
thereafter to sell the securities of the Future Offering respecting which such
Buyer's rights were not exercised, upon the principal economic terms and
conditions, no more favorable to the purchasers thereof than specified in the
Future Offering Notice; provided, however, it is understood that legal
documentation may differ significantly from investor to investor, but the
principal economic terms will remain no more favorable to the purchaser thereof
than those specified in the Future Offering Notice.  In the event the Company
has not sold such securities of the Future Offering within such sixty (60) day
period, the Company shall not thereafter issue or sell such securities without
first offering such securities to the Buyers in the manner provided in this
Section 4(f).  The Capital Raising Limitation shall not apply to a loan from a
commercial bank or any transaction involving the Company's issuances of
securities in connection with a merger, consolidation or sale of assets, or in
connection with any strategic partnership or joint venture (the primary purpose
of which is not to raise equity capital), or in connection with the disposition
or acquisition of a business, product or license by the Company or exercise of
options by employees, consultants or directors.  The Capital Raising Limitation
also shall not apply to the issuance of securities pursuant to a firm
commitment, underwritten public offering or upon exercise or conversion of the
Company's options, warrants or other convertible securities outstanding as of
the date hereof or to the grant of additional options or warrants, or the
issuance of additional securities, under any Company stock option or restricted
stock plan for the benefit of the Company's employees, directors or
consultants.

                 g.       Reservation of Shares.  The Company shall take all
action necessary to at all times have authorized, and reserved for the purpose
of issuance, no less than 200% of the number of shares of Common Stock needed
to provide for the issuance of the Conversion





                                      -12-
<PAGE>   13
Shares; provided that all shares of the Common Stock authorized and not
otherwise reserved for other purposes as of the date hereof shall be reserved
for the purpose of issuance of the Conversion Shares.

                 h.       Listing.  The Company shall promptly secure the
listing of the Conversion Shares upon each national securities exchange or
automated quotation system, if any, upon which shares of Common Stock are then
listed (subject to official notice of issuance) and shall maintain, so long as
any other shares of Common Stock shall be so listed, such listing of all
Conversion Shares from time to time issuable under the terms of this Agreement
and the Registration Rights Agreement.  The Company shall maintain the Common
Stock's authorization for quotation on AMEX, the Nasdaq National Market, or The
New York Stock Exchange, Inc.  The Company shall promptly provide to each Buyer
copies of any notices it receives from AMEX regarding the continued eligibility
of the Common Stock for listing on AMEX.

                 i.       Expenses.  Subject to Section 9(1) below, at the
Closing, the Company shall pay a nonaccountable expense allowance of Fifteen
Thousand Dollars ($15,000) to the Buyers or their designee(s).

                 j.       Proxy.  The Company shall provide each stockholder
entitled to vote at the next annual stockholder meeting, a proxy statement,
which has been previously reviewed by the Buyers and a counsel of their choice,
soliciting each such stockholder's affirmative vote at such annual stockholder
meeting for (i) approval of the Company's issuance of Series C Preferred Shares
and Conversion Shares as described in this Agreement and (ii) authorization of
an increase in the number of authorized shares of Common Stock to at least
200,000,000 shares of Common Stock, and the Company shall use its best efforts
to solicit its stockholders' approval of such issuance of Common Stock and such
increase in authorized shares of Common Stock.

         5.      TRANSFER AGENT INSTRUCTIONS.

                 The Company shall issue irrevocable instructions to its
transfer agent to issue certificates, registered in the name of each Buyer or
its respective nominee(s), for the Conversion Shares in such amounts as
specified from time to time by each Buyer to the Company upon conversion of the
Series C Preferred Shares (the "IRREVOCABLE TRANSFER AGENT INSTRUCTIONS").
Prior to registration of the Conversion Shares under the 1933 Act, all such
certificates shall bear the restrictive legend specified in Section 2(g) of
this Agreement.  The Company warrants that no instruction other than the
Irrevocable Transfer Agent Instructions referred to in this Section 5, and stop
transfer instructions to give effect to Section 2(f) hereof (in the case of the
Conversion Shares, prior to registration of the Conversion Shares under the
1933 Act) will be given by the Company to its transfer agent and that the
Series C Preferred Shares and the Conversion Shares shall otherwise be freely
transferable on the books and records of the Company as and to the extent
provided in this Agreement and the Registration Rights Agreement.  Nothing in
this Section 5 shall affect in any way each Buyer's obligations and agreement
to comply with all applicable securities laws upon resale of the Series C
Preferred Shares or Conversion Shares.  If a Buyer provides the Company with an
opinion of counsel, reasonably satisfactory in form, and substance to the
Company, that registration of a resale by such Buyer of any of the Series C
Preferred Shares or the Conversion Shares is not required





                                      -13-
<PAGE>   14
under the 1933 Act, the Company shall permit the transfer, and, in the case of
the Conversion Shares, promptly instruct its transfer agent to issue one or
more certificates in such name and in such denominations as specified by such
Buyer.  The Company acknowledges that a breach by it of its obligations
hereunder will cause irreparable harm to the Buyers by vitiating the intent and
purpose of the transaction contemplated hereby.  Accordingly, the Company
acknowledges that the remedy at law for a breach of its obligations under this
Section 5 will be inadequate and agrees, in the event of a breach or threatened
breach by the Company of the provisions of this Section 5, that the Buyers
shall be entitled, in addition to all other available remedies, to an
injunction restraining any breach and requiring immediate issuance and
transfer, without the necessity of showing economic loss and without any bond
or other security being required.

         6.      CONDITIONS TO THE COMPANY'S OBLIGATION TO SELL.

                 The obligation of the Company hereunder to issue and sell the
Series C Preferred Shares to each Buyer at the Closing is subject to the
satisfaction, at or before the Closing Date, of each of the following
conditions, provided that these conditions are for the Company's sole benefit
and may be waived by the Company at any time in its sole discretion:

                 a.       Such Buyer shall have executed this Agreement and the
Registration Rights Agreement and delivered the same to the Company.

                 b.       The Certificate of Designations shall have been filed
with the Secretary of State of the State of Delaware.

                 c.       Such Buyer shall have delivered to the Company the
Purchase Price for the Series C Preferred Shares being purchased by such Buyer
at the Closing by wire transfer of immediately available funds pursuant to the
wire instructions provided by the Company.

                 d.       The representations and warranties of such Buyer
shall be true and correct in all material respects as of the date when made and
as of the Closing Date as though made at that time (except for representations
and warranties that speak as of a specific date), and such Buyer shall have
performed, satisfied and complied in all material respects with the covenants,
agreements and conditions required by this Agreement to be performed, satisfied
or complied with by such Buyer at or prior to the Closing Date.

         7.      CONDITIONS TO EACH BUYER'S OBLIGATION TO PURCHASE.

                 The obligation of each Buyer hereunder to purchase the Series
C Preferred Shares at the Closing is subject to the satisfaction, at or before
the Closing Date, of each of the following conditions, provided that these
conditions are for each Buyer's sole benefit and may be waived by such Buyer at
any time in its sole discretion:

                 a.       The Company shall have executed this Agreement and
the Registration Rights Agreement, and delivered the same to such Buyer.





                                      -14-
<PAGE>   15
                 b.       The Certificate of Designations, shall have been
filed with the Secretary of State of the State of Delaware, and a copy thereof
certified by such Secretary of State shall have been delivered to such Buyer.

                 c.       The Common Stock shall be authorized for quotation on
AMEX, the Nasdaq National Market or The New York Stock Exchange, Inc., trading
in the Common Stock issuable upon conversion of the Series C Preferred Shares
to be traded on AMEX, the Nasdaq National Market or The New York Stock
Exchange, Inc. shall not have been suspended by the SEC, AMEX, The Nasdaq Stock
Market, Inc., or The New York Stock Exchange, Inc. and all of the Conversion
Shares issuable upon conversion of the Series C Preferred Shares to be sold at
the Closing shall be listed upon AMEX, the Nasdaq National Market or The New
York Stock Exchange, Inc.

                 d.       The representations and warranties of the Company
shall be true and correct in all material respects (except to the extent that
any of such representations and warranties is already qualified as to
materiality in Section 3 above, in which case, such representations and
warranties shall be true and correct without further qualification) as of the
date when made and as of the Closing Date as though made at that time (except
for representations and warranties that speak as of a specific date) and the
Company shall have performed, satisfied and complied in all material respects
with the covenants, agreements and conditions required by this Agreement to be
performed, satisfied or complied with by the Company at or prior to the Closing
Date.  Such Buyer shall have received a certificate, executed by the Chief
Executive Officer of the Company, dated as of the Closing Date, to the
foregoing effect and as to such other matters as may be reasonably requested by
such Buyer including, without limitation, an update as of the Closing Date
regarding the representation contained in Section 3(c) above.

                 e.       Such Buyer shall have received the opinion of the
Company's counsel dated as of the Closing Date, in form, scope and substance
reasonably satisfactory to such Buyer and in substantially the form of Exhibit
C attached hereto.

                 f.       The Company shall have executed and delivered to such
Buyer the Stock Certificates (in such denominations as such Buyer shall
request) for the Series C Preferred Shares being purchased by such Buyer at the
Closing.

                 g.       The Board of Directors of the Company shall have
adopted the resolutions in substantially the form of Exhibit D attached hereto.

                 h.       As of the Closing Date, such Buyer shall have
received a copy of letter agreements executed by stockholders of the Company
who hold at least twenty-five percent (25%) of the Common Stock outstanding as
of the Closing Date (collectively, the "APPROVING STOCKHOLDERS") to the effect
that each of the Approving Stockholders, as common stockholders of the Company,
consents to the Company's issuance of Series C Preferred Shares and Conversion
Shares as described in this Agreement and covenants to vote such Approving
Stockholder's shares of Common Stock in favor of (i) the issuance of Series C
Preferred Shares and Conversion Shares as described in this Agreement and (ii)
the increase in the number of





                                      -15-
<PAGE>   16
authorized shares of Common Stock described in Section 4(j) above, at the next
annual stockholders meeting at which such vote is solicited, as described in
Section 4(j) above.

                 i.       The Irrevocable Transfer Agent Instructions, in form
and substance satisfactory to the Buyers, shall have been delivered to and
acknowledged in writing by the Company's transfer agent.

         8.      INDEMNIFICATION.  In consideration of each Buyer's execution
and delivery of this Agreement and acquiring the Series C Preferred Shares and
Conversion Shares hereunder and in addition to all of the Company's other
obligations under this Agreement, the Company shall defend, protect, indemnify
and hold harmless each Buyer and each other holder of Series C Preferred Shares
and Conversion Shares and all of their officers, directors, employees and
agents (including, without limitation, those retained in connection with the
transactions contemplated by this Agreement) (collectively, the "INDEMNITEES")
from and against any and all actions, causes of action, suits, claims, losses,
costs, penalties, fees, liabilities and damages, and expenses in connection
therewith (irrespective of whether any such Indemnitee is a party to the action
for which indemnification hereunder is sought), and including reasonable
attorneys' fees and disbursements (the "INDEMNIFIED LIABILITIES"), incurred by
the Indemnitees or any of them as a result of, or arising out of, or relating
to (a) any misrepresentation or breach of any representation or warranty made
by the Company in this Agreement, the Certificate of Designations or the
Registration Rights Agreement or any other certificate, instrument or document
contemplated hereby or thereby, (b) any breach of any covenant, agreement or
obligation of the Company contained in this Agreement, the Certificate of
Designations or the Registration Rights Agreement or any other certificate,
instrument or document contemplated hereby or thereby, or (c) any cause of
action, suit or claim brought or made against such Indemnitee and arising out
of or resulting from the execution, delivery, performance or enforcement of
this Agreement or any other instrument, document or agreement executed pursuant
hereto by any of the Indemnitees, any transaction financed or to be financed in
whole or in part, directly or indirectly, with the proceeds of the issuance of
the Series C Preferred Shares or the status of such Buyer or holder of the
Series C Preferred Shares or the Conversion Shares as an investor in the
Company.  To the extent that the foregoing undertaking by the Company may be
unenforceable for any reason, the Company shall make the maximum contribution
to the payment and satisfaction of each of the Indemnified Liabilities which is
permissible under applicable law.

         9.      GOVERNING LAW; MISCELLANEOUS.

                 a.       Governing Law.  This Agreement shall be governed by
and interpreted in accordance with the laws of the State of California without
regard to the principles of conflict of laws.

                 b.       Counterparts.  This Agreement may be executed in two
or more identical counterparts, all of which shall be considered one and the
same agreement and shall become effective when counterparts have been signed by
each party and delivered to the other party.  In the event any signature page
is delivered by facsimile transmission, the party using such means of delivery
shall cause four (4) additional original executed signature pages to be
physically delivered to the other party within five (5) days of the execution
and delivery hereof.





                                      -16-
<PAGE>   17
                 c.       Headings.  The headings of this Agreement are for
convenience of reference and shall not form part of, or affect the
interpretation of, this Agreement.

                 d.       Severability.  If any provision of this Agreement
shall be invalid or unenforceable in any jurisdiction, such invalidity or
unenforceability shall not affect the validity or enforceability of the
remainder of this Agreement in that jurisdiction or the validity or
enforceability of any provision of this Agreement in any other jurisdiction.

                 e.       Entire Agreement; Amendments.  This Agreement
supersedes all other prior oral or written agreements between the Buyers, the
Company, their affiliates and persons acting on their behalf with respect to
the matters discussed herein, and this Agreement and the instruments referenced
herein contain the entire understanding of the parties with respect to the
matters covered herein and therein and, except as specifically set forth herein
or therein, neither the Company nor any Buyer makes any representation,
warranty, covenant or undertaking with respect to such matters.  No provision
of this Agreement may be waived or amended other than by an instrument in
writing signed by the party to be charged with enforcement.

                 f.       Notices.  Any notices consents, waivers or other
communications required or permitted to be given under the terms of this
Agreement must be in writing and will be deemed to have been delivered (i) upon
receipt, when delivered personally; (ii) upon receipt, when sent by facsimile,
provided a copy is mailed by U.S. certified mail, return receipt requested;
(iii) three (3) days after being sent by U.S. certified mail, return receipt
requested, or (iv) one (1) day after deposit with a nationally recognized
overnight delivery service, in each case properly addressed to the party to
receive the same.  The addresses and facsimile numbers for such communications
shall be:

         If to the Company:

                 166 Baypointe Parkway
                 San Jose, California  95134
                 Telephone:       (408) 468-1800
                 Facsimile:       (408) 468-1619
                 Attention:       President





                                      -17-
<PAGE>   18
         With a copy to:

                 Cooley Godward LLP
                 3000 El Camino Real
                 5 Palo Alto Square
                 Palo Alto, California  94306
                 Telephone:       (415) 843-5000
                 Facsimile:       (415) 843-5048
                 Attention:       Andrei Manoliu, Esq.

         If to the Transfer Agent:

                 Registrar and Transfer Company
                 10 Commerce Drive
                 Cranford, New Jersey 07016-3572
                 Telephone:        (908) 272-8511
                 Facsimile:        (908) 272-6951
                 Attention:        Priscilla Roopnarine

         If to a Buyer, to its address and facsimile number on the Schedule of
Investors, with copies to such Buyer's counsel as set forth on the Schedule of
Investors.  Each party shall provide five (5) days' prior written notice to the
other party of any change in address or facsimile number.

                 g.       Successors and Assigns.  This Agreement shall be
binding upon and inure to the benefit of the parties and their respective
successors and assigns.  The Company shall not assign this Agreement or any
rights or obligations hereunder without the prior written consent of the Buyer.
A Buyer may assign its rights hereunder without the consent of the Company,
provided, however, that any such assignment shall not release such Buyer from
its obligations hereunder unless such obligations are assumed by such assignee
and the Company has consented to such assignment and assumption.

                 h.       No Third Party Beneficiaries.  This Agreement is
intended for the benefit of the parties hereto and their respective permitted
successors and assigns, and is not for the benefit of, nor may any provision
hereof be enforced by, any other person.

                 i.       Survival.  Unless this Agreement is terminated under
Section 9(l), the representations and warranties of the Company and the Buyers
contained in Sections 2 and 3, the agreements and covenants set forth in
Sections 4, 5, 9(g), 9(h), 9(j) and 9(k), the indemnification provisions set
forth in Section 8 and this Section 9(i), shall survive the Closing.  Each
Buyer shall be responsible only for its own representations, warranties,
agreements and covenants hereunder.

                 j.       Publicity.  The Company and each Buyer shall have the
right to approve before issuance any press releases or any other public
statements with respect to the transactions contemplated hereby; provided,
however, that the Company shall be entitled, without the prior approval of any
Buyer, to make any press release or other public disclosure with respect to
such





                                      -18-
<PAGE>   19
transactions as is required by applicable law and regulations (although each
Buyer shall be consulted by the Company in connection with any such press
release or other public disclosure prior to its release and shall be provided
with a copy thereof).

                 k.       Further Assurances.  Each party shall do and perform,
or cause to be done and performed, all such further acts and things, and shall
execute and deliver all such other agreements, certificates, instruments and
documents, as the other party may reasonably request in order to carry out the
intent and accomplish the purposes of this Agreement and the consummation of
the transactions contemplated hereby.

                 l.       Termination.  In the event that the Closing shall not
have occurred with respect to a Buyer on or before five (5) business days from
the date hereof due to the Company's or such Buyer's failure to satisfy the
conditions set forth in Sections 6 and 7 above (and the nonbreaching party's
failure to waive such unsatisfied condition(s)), the nonbreaching party shall
have the option to terminate this Agreement with respect to such breaching
party at the close of business on such date without liability of any party to
any other party; provided, however, that if this Agreement is terminated
pursuant to this Section 9(l), the Company shall remain obligated to reimburse
the Buyers for the expenses described in Section 4(i) above.

                 m.       Placement Agent.  The Company acknowledges that it
has engaged a placement agent in connection with the sale of the Series C
Preferred Shares, which placement agent may have formally or informally engaged
other agents on its behalf.  The Company shall be responsible for the payment
of any placement agent's fees relating to or arising out of the transactions
contemplated hereby.

                 n.       No Strict Construction.  The language used in this
Agreement will be deemed to be the language chosen by the parties to express
their mutual intent, and no rules of strict construction will be applied
against any party.





                                      -19-
<PAGE>   20
         IN WITNESS WHEREOF, the Buyers and the Company have caused this
Securities Purchase Agreement to be duly executed as of the date first written
above.

COMPANY:                               BUYERS:
- --------                               -------

JTS CORPORATION                        NELSON PARTNERS


By:                                     By:       
   -------------------------               -------------------------------
   Name:     David T. Mitchell             Name:  Anne Dupuy
   Its:      President and Chief           Its:   Officer
             Executive Officer

                                       OLYMPUS SECURITIES, LTD.


                                       By:   
                                          ---------------------------------
                                          Name:  Anne Dupuy
                                          Its:   Alternate Director


                                       RGC INTERNATIONAL INVESTORS, LDC

                                       By:  Rose Glen Capital Management, L.P.,
                                            as Investment Manager

                                       By:  RGC General Partner Corp.,
                                            as General Partner


                                       By:   
                                          ---------------------------------
                                          Name:  Wayne Bloch
                                          Its:   Managing Director


                                       CAPITAL VENTURES INTERNATIONAL

                                       By:  Bala International Inc.,
                                            as agent


                                       By:   
                                          ---------------------------------
                                          Name:  Andrew Frost
                                          Its:   Director
<PAGE>   21
                             SCHEDULE OF INVESTORS



                            
<TABLE>
<CAPTION>
                                                                                Number of
                                                                                Series C
                                           Investor Address                     Preferred           Investor's Legal Counsel
      Investor Name                      and Facsimile Number                    Shares               and Counsel's Address
- -----------------------             -----------------------------               ---------       --------------------------------
<S>                                 <C>                                           <C>           <C>
Nelson Partners                     c/oLeeds Management Services                  6,250         Citadel Investment Group, L.L.C.
                                    129 Front Street, 5th Floor                                 225 West Washington Street
                                    Hamilton HM12 Bermuda                                       Chicago, Illinois 60606
                                    Attn:  Anne Dupuy                                           Attention: Kenneth C. Griffin
                                    Facsimile: (441) 292-2239                                      Kenneth A. Simpler
                                                                                                Facsimile: (312) 368-1348
                                                                                                Katten Muchin & Zavis
                                                                                                525 W. Monroe Street
                                                                                                Chicago, Illinois 60661-3693
                                                                                                Attention: Matthew S. Brown, Esq.
                                                                                                   Robert J. Brantman, Esq.
                                                                                                Facsimile: (312) 902-1061

Olympus Securities, Ltd.            c/oLeeds Management Services                  6,250         Citadel Investment Group, L.L.C.
                                    129 Front Street, 5th Floor                                 225 West Washington Street
                                    Hamilton HM12 Bermuda                                       Chicago, Illinois 60606
                                    Attn:  Anne Dupuy                                           Attention: Kenneth C. Griffin
                                    Facsimile: (441) 292-2239                                      Kenneth A. Simpler
                                                                                                Facsimile: (312) 368-1348

                                                                                                Katten Muchin & Zavis
                                                                                                525 W. Monroe Street
                                                                                                Chicago, Illinois 60661-3693
                                                                                                Attention: Matthew S. Brown, Esq.
                                                                                                   Robert J. Brantman, Esq.
                                                                                                Facsimile: (312) 902-1061

RGC International Investors, LDC    c/o Rose Glen Capital Management, L.P.        7,500
                                    440 East Swedesford Road
                                    Suite 2025
                                    Wayne, Pennsylvania  19087
                                    Attn:  Wayne Bloch
                                    Facsimile: (610) 971-2212
                                    Residency:  Cayman Islands

Capital Ventures International      c/o Bala International Inc.                   5,000
                                    401 City Avenue
                                    Bala Cynwyd, Pennsylvania 19004
                                    Attn: Michael Spolan
                                    Facsimile: (610) 617-2707
                                    Residency:  Cayman Islands

</TABLE>
<PAGE>   22

                            JTS DISCLOSURE SCHEDULES




















        
                                        1.
<PAGE>   23
                                  SECTION 3(a)

                         ORGANIZATION AND QUALIFICATION

JTS has the following Significant Subsidiaries:  Note: JTS owns approximately
ninety-nine percent (99%) of the capital stock of Moduler Electronics through
its wholly-owned subsidiaries, Asperal, Dexar and Mauritius:


         Asperal Holdings, Inc., a corporation organized under the laws of
         Panama ("Asperal").

         Dexar Holdings Inc., a corporation organized under the laws of Panama
         ("Dexar").

         JTS Mauritius Holdings, a corporation organized under the laws of
         Mauritius ("Mauritius").

         JTS Technology Pvt. Ltd., formerly known as Modular Electronics Pvt.
         Ltd., a corporation organized under the laws of India ("Moduler
         Electronics").

Certain intellectual property rights covered by Section 3(n) of the Agreement
are owned or licensed through the above noted subsidiaries.

The balance of the ownership of Moduler Electronics is held by members of the
family of Mr. Sirjang Tandon, an officer and director of the Company, or by
entities controlled by such family (reference also to Section 3(v) of the
Agreement).




                                       2.
<PAGE>   24
                                  SECTION 3(b)

         AUTHORIZATION; ENFORCEMENT; COMPLIANCE WITH OTHER INSTRUMENTS

Please note that stockholder approval is required to increase the number of
authorized shares of Common Stock to more than 150,000,000.  As a result, in
certain circumstances, prior to receipt of such approval, the Company may not
be able to issue all of the Conversion Shares (reference also to Sections 3(d),
3(e) and 3(x) of the Agreement).































                                       3.


<PAGE>   25
                                  SECTION 3(c)

                                 CAPITALIZATION

a)      OPTIONS:

Attached hereto as Schedule 3(c)(1) is a list of outstanding option holders of
JTS as of January 18, 1997.

b)      RESTRICTED STOCK PURCHASE AGREEMENTS:

In January 1996, JTS made loans to each of David T. Mitchell, Kenneth D. Wing
and Virginia Walker in connection with the purchase by such individuals of
2,000,000 shares, 300,000 shares, and 250,000 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.  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.  Mr. Wing and Ms. Walker liquidated a portion of
their vested holdings subsequent to July 30, 1996.

In March 1996, Mr. Mitchell and Mr. Sirjang L. Tandon each purchased 1,000,000
shares of JTS Common Stock at a purchase price of $1.00 per share.  All of such
shares are subject to a right of repurchase at cost in favor of JTS, which
repurchase option lapses as to all such shares after five years of service with
JTS; provided, however, that with respect to each individual, JTS' right of
repurchase will lapse at the rate of one-eighth of the total shares purchased
in September 1996 and as to 1/48th of the total shares purchased per month
thereafter.  In addition, at the discretion of JTS' Board of Directors, the
right of repurchase with respect to Mr. Mitchell's 1,000,000 shares of JTS
Common Stock may be caused to lapse as to all such shares at any time.

c)      WARRANTS:

JTS has issued a Common Stock Purchase Warrant dated as of December 18, 1995
with respect to 50,000 shares of Common Stock at an exercise price of $3.00 per
share to Silicon Valley Bank in connection with a line of credit of up to
$5,000,000 provided by Silicon Valley Bank.




                                       4.

<PAGE>   26
JTS has issued a Common Stock Purchase Warrant dated as of April 4, 1996 with
respect to 750,000 shares of Common Stock at an exercise price of $.25 per
share to Lunenburg S.A., a Tandon family affiliated entity.  The Common Stock
Purchase Warrant was immediately exercisable as to 500,000 shares of Common
Stock, and contingently exercisable as to 250,000 shares of Common Stock at
such time as there became available to Moduler Electronics credit facilities in
India aggregating at least $29,000,000.  Lunenburg S.A. exercised the Common
Stock Purchase Warrant as to 500,000 shares of Common Stock on June 25, 1996.
The Common Stock Purchase Warrant shall expire on February 25, 2001.

JTS has issued to GFL Advantage Fund Limited and Genesee Fund Limited (each, a
"Series B Investor") 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 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 for up to three years after the issuance date
of the Investor Warrants.

JTS has issued to Wharton Capital Corporation, the placement agent in the
November 1996 private placement transaction in which the Company issued Series
B Preferred Stock, warrants to purchase 37,500 shares of Common Stock at
$4.2625 per share ("Finder's Warrants").  The Finder's Warrants are
exercisable through November 5, 1999.

d)      REGISTRATION RIGHTS

Under that certain Registration Rights Agreement, dated as of February 3, 1995,
as amended on August 7, 1995, and as further amended on April 4, 1996, by and
among JTS and the holders of Registrable Securities (as defined therein), JTS
has granted certain registration rights to such holders.

In connection with the Common Stock Purchase Warrants issued to VLLI and
Silicon Valley Bank, JTS has granted certain registration rights.

Under those certain Registration Rights Agreements between JTS and each of GFL
Advantage Fund Limited and Genesee Fund Limited - Portfolio B (collectively,
"Series B Investors"), dated as of October 31, 1996, JTS has granted certain
registration rights to the Series B Investors.

e)      DEBT SECURITIES

In connection with JTS' acquisition of Atari, JTS is a party to certain Atari
Indenture Agreements and supplements thereto ("Atari Debentures").  The Atari
Debentures are



                                       5.
<PAGE>   27
convertible into JTS Common Stock at a conversion price of $16.3125 per share
and are due on April 29, 2002.  The Atari Debentures are more fully set forth
in the SEC Documents.



































                                       6.
<PAGE>   28
                                  SECTION 3(e)

                                  NO CONFLICTS

None
















                                       7.
<PAGE>   29
                                  SECTION 3(g)

                           ABSENCE OF CERTAIN CHANGES

Although the Company does not believe that the following will have a material
adverse effect on the Company, please note the disclosures relating to Sections
3(e), 3(h) and 3(u) herewith.
















                                       8.
<PAGE>   30
                                  SECTION 3(h)

                             ABSENCE OF LITIGATION

1.      JTS, via its merger with Atari, is a party to the following suits:

        a.   Atari Corporation v. Philips Laser Magnetic Storage, and Does 1-10.
             No. CV 754767
             Superior Court of Santa Clara County. Filed December
             22, 1995. Suit for breach of contract for Philips for failure to
             ship CD players. Philips has asserted a counterclaim against Atari
             for approximately $1,000,000.

        b.   Atari Corporation v. Probe Entertainment Limited, Acclaim
             Entertainment, Inc. and Does-10.
             No. CV 754749
             United States District Court, San Francisco. Filed December 21,
             1995. Action for breach of software license agreements related to
             the Jaguar products. Acclaim has claims for failure to pay
             royalties of approximately $1,250,000.

        c.   Sears, Roebuck and Company v. Atari Computer
             No. CV 750697
             Superior Court of Santa Clara County. Filed 6/30/95. Sears seeks
             approximately $91,000 for credits on its accounts.

        d.   In re The Federated Group, Inc., Alleged Debtor.
             No. 92-50412-JRG Chapter 7
             U.S.B.C. (N.D. Cal. Div. 5)
             Certain debenture holders filed an involuntary bankruptcy petition
             against The Federated Group, Inc., a subsidiary of Atari
             Corporation, in 1992. The Federated Group, Inc. prevailed at trial.
             Presently, the case is on appeal before the Ninth Circuit.

        e.   Interinvest S.A. v. Atari Corporation, et al.
             Court of First Instance #36, Madrid, Spain
             Filed May 24, 1995
             Interinvest seeks approximately $500,000 in damages.

        f.   Citizens v. Atari Computer
             Superior Court of Santa Clara County.
             Citizen seeks approximately $900,000 on accounts.

        g.   Yercaf v. Atari Computer
             No. CV 758843
             Superior Court of Santa Clara County. Filed June 21, 1996.




                                       9.
<PAGE>   31
                Former Atari landlord seeks approximately $70,000.

        h.      Extron Contract Manufacturing Company v. Atari Computer
                No. CV 758563
                Superior Court of Santa Clara County. Filed June 10, 1996.
                Former Atari supplier in dispute over inventory seeks
                approximately $215,000 on accounts.

        i.      Integrated Silicon Solutions, Inc. v. Atari Computer
                No. DC 96330055
                Municipal Court Santa Clara County.  Filed June 3, 1996.
                ISS seeks $22,348.70 on account.

        j.      Trans World Computer, Gmbh. vs. JTS Corporation and JT Storage,
                Inc.
                No. C9620886SWPVT
                U.S. District Court.  Filed October 24, 1996.
                Trans World seeks $19,720 on account.

        k.      Tradewell Incorporated v. Atari Computer
                No. 95CIV935LMN
                U.S. District Court South District of New York.  Filed March
                21, 1995.
                Tradewell claims breach of contract and seeks damages of
                approximately $50,000.  Atari is counter claiming for
                approximately $1,000,000.

        l.      JTS Corporation v. Creative Edge Software Limited
                No. CV 762624
                Superior Court of Santa Clara County.  Filed December 6, 1996.
                JTS is seeking $75,000 for breach of contract.

2.      JTS is involved in a matter with Dusseldorf Securities Limited as is
        further described in the letters set forth on Schedule 3(h)(l).

 3.     The foregoing matters may also pertain to Sections 3(e) (only with
        respect to paragraph 2 above), 3(j) and 3(t) (only with respect to
        paragraph 2 above) of the Agreement.










                                      10.
<PAGE>   32
                                  SECTION 3(n)

                          INTELLECTUAL PROPERTY RIGHTS

1.      JTS believes that Sony U.S.A is infringing one of Atari's patents:

                -       U.S. Patent 4,471,465 entitled "Video Display System
                        with Multicolor Graphic Selection" issued September 11,
                        1984 (the "465 PATENT").

2.      JTS also believes that several major manufacturers of graphics boards
        for computers are using technology which infringes JTS' 465 Patent.






































                                      11.
<PAGE>   33
                                  SECTION 3(p)
                                     TITLE

a)      FINANCING STATEMENTS WITH RESPECT TO JTS

Silicon Valley Bank has filed a financing statement in connection with certain
collateral.

JLA Credit Corporation has filed a financing statement in connection with a
certain Toshiba Perception "E" Telephone system.

Compaq Computer Corporation has filed a financing statement in connection with
certain rights to receive royalty payments from Western digital Corporation
pursuant to the Technology Transfer and License Agreement by and among JTS and
Western Digital Corporation.

Copelco has filed a financing statement in connection with certain equipment.

Phoenix Leasing Incorporated has filed a financing statement in connection with
the leasing of certain equipment, fixtures and other collateral.

Ecolab has filed a financing statement in connection with the leasing of
certain equipment.

Telogy, Inc., has filed a financing statement in connection with the leasing of
certain equipment.

b)      MODULER ELECTRONICS EQUIPMENT LEASES

Moduler Electronics is a party to a hire purchase agreement (capitalized
personal property lease) with Sundaram Finance Limited.

c)      MODULER ALLOTMENT LETTERS

JTS' Madras manufacturing facilities are held pursuant to allotment letters
with certain governmental entities in India.

                                      12.
<PAGE>   34
                                  SECTION 3(r)

                               REGULATORY PERMITS

Although the Company does not believe that the following will have a material
adverse effect on the Company, please note the disclosure relating to Sections,
3(e) herewith.

                                       13.
<PAGE>   35
                                  SECTION 3(u)

                                   TAX STATUS

Moduler Electronics tax return for the fiscal tax year ending March 31, 1995
was filed late, however, no taxes were due.

Moduler Electronics was informed of a sales tax dispute related to the sale of
certain of Moduler Electronics' fixed assets to another Tandon Group Company.
Moduler Electronics believes that the dispute is without merit and expects that
the dispute will be resolved without additional payment.

An audit of Forms 1099 of the former Atari is being conducted for 1993 and 1994.

There is a state tax lien on the assets of Federated which has been adequately
reserved for in the JTS Financial statements.

Certain of JTS' inactive subsidiaries have not filed tax returns for the last
several fiscal years. JTS does not expect any material tax liability to result
from the filing of these returns.

The foregoing disclosures may also pertain to Sections 3(h) and 3(j) of the
Agreement.


                                      14.
<PAGE>   36
                                  SECTION 3(v)

                              CERTAIN TRANSACTIONS

JTS has made interest-free loans to certain employees as follows:

        JTS has made a forgivable loan to Messrs. Pickford, Singh, Sidu, Wing,
        Dawes, and S. Harris in the amounts of $50,000.00; $35,000.00;
        $40,000.00; $245,000.00; $20,000.00; and $100,000.00, respectively.

        JTS has made a personal loan to Mr. Kaczeus in the amount of $26,000.00,
        of which $21,000.00 is still outstanding.

Aside from accrual salary in the ordinary course of business, JTS is obligated
to certain employees as follows:

        JTS has committed to make a bonus payment to Mr. Niedrich in the amounts
        of $20,000.00.  JTS has not yet disbursed these funds.





                                      15.
<PAGE>   37
                                SCHEDULE 3(c)(1)

                         JTS Stock Option Holder Table
<PAGE>   38
                                SCHEDULE 3(h)(1)

                   JTS-Dusseldorf Securities Limited Letters


<PAGE>   1

                                                                Exhibit 23.1

                   CONSENT OF INDEPENDENT PUBLIC ACCOUNTANTS

        As independent public accountants, we hereby consent to the use of our
reports and to all references to our Firm included in or made a part of this
registration statement.

                                        ARTHUR ANDERSEN LLP


San Jose, California
February 11, 1997




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