1998



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

This section and other parts of this Form 10-K contain forward-looking statements that involve risks and uncertainties. The Company's actual results may differ significantly from the results discussed in the forward-looking statements. Factors that might cause such differences include, but are not limited to, those discussed in the subsection entitled "Factors That May Affect Operating Results and Financial Condition" below. The following discussion should be read in conjunction with the consolidated financial statements and notes thereto included in Item 8 of this Form 10-K. All information is based on the Company's fiscal calendar. 

RESULTS OF OPERATIONS 

OVERVIEW 

During 1998, the Company returned to profitability, reporting net income in all four quarters of the fiscal year. Profitability was achieved for several major reasons. First, the Company continued and essentially completed a restructuring plan which it began in 1996. The restructuring plan has led to reductions in headcount and related expenses in all areas of the Company's business and the write-down and disposal of certain operating assets. Consequently, operating expenses, not including cost of sales and special charges, declined $560 million or 32% to $1.21 billion in 1998 compared to 1997. Second, gross margin improved in 1998, rising to 25% of net sales in 1998 compared to 19% in 1997. In addition to benefits derived from the restructuring plan and an overall decline in component costs, margins were favorably affected by actions which improved overall inventory management and actions taken to simplify and focus the Company's product line. Third, the Company made changes to its distribution channel policies which further contributed to the decline in selling, general and administrative expenses and the increased gross margin. 

Despite the return to profitability in 1998, the Company reported sequential declines in quarterly net sales in each of the first three quarters of the fiscal year and reported year-over-year declines in net sales during every quarter of 1998. Despite positive signs of growth in the fourth quarter, including a sequential rise in net sales and unit sales over the third quarter and a year-over-over increase in unit sales over the fourth quarter of 1997, total net sales declined 16% in fiscal 1998 compared to 1997. 

The Company's future operating results and financial condition are dependent upon the Company's ability to successfully develop, manufacture, and market technologically innovative products in order to meet the dynamic conditions within the highly competitive market for personal computers. Potential risks and uncertainties that could affect the Company's future operating results and financial condition include, among other things, continued competitive pressures in the marketplace and the effect of any reaction by the Company to such competitive pressures, including pricing actions by the Company; the availability of key components on terms acceptable to the Company; the Company's ability to supply products in certain categories; the Company's