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                                 UNITED STATES
                       SECURITIES AND EXCHANGE COMMISSION
                             WASHINGTON, D.C. 20549

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

                                   FORM 10-K
                                 ANNUAL REPORT
     Pursuant to Section 13 or 15(d) of the Securities Exchange Act of 1934
                  FOR THE FISCAL YEAR ENDED DECEMBER 31, 1999
                         Commission File Number 1-13317
                             DOT HILL SYSTEMS CORP.
             (Exact name of registrant as specified in its charter)

<TABLE>
<S>                                       <C>
                NEW YORK                                13-3460176
        (State of incorporation)          (I.R.S. employer identification Number)

          6305 EL CAMINO REAL                              92009
              CARLSBAD, CA                              (Zip code)
(Address of principal executive offices)
</TABLE>

                                  760-931-5500
                        (Registrant's telephone number)

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

Securities registered pursuant to Section 12(b) of the Act:

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<CAPTION>
                                                         SHARES
                                                     OUTSTANDING AT   NAME OF EACH EXCHANGE ON
                TITLE OF EACH CLASS                  MARCH 20, 2000       WHICH REGISTERED
                -------------------                  --------------   ------------------------
<S>                                                  <C>              <C>
Common stock, $.01 par value.......................    24,109,603     New York Stock Exchange
</TABLE>

          Securities registered pursuant to Section 12(g) of the Act:

None

    Indicate by check mark whether the registrant (1) has filed all reports
required to be filed by Section 13 or 15(d) of the Securities Exchange Act of
1934 during the preceding 12 months (or for such shorter period that the
registrant was required to file such reports), and (2) has been subject to such
filing requirements for the past 90 days. Yes /X/  No / /

    Indicate by check mark if disclosure of delinquent filers pursuant to Item
405 of Regulation S-K is not contained herein, and will not be contained, to the
best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form 10-K or any amendment to this
Form 10-K. Yes /X/  No / /

    The aggregate market value of the voting stock held by non-affiliates of the
registrant at March 20, 2000 was $154,941,884.

    Documents incorporated by reference:

    Portions of Dot Hill's definitive Proxy Statement dated March 30, 2000 into
Part III of Form 10-K.

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                             DOT HILL SYSTEMS CORP.
                      INDEX TO ANNUAL REPORT ON FORM 10-K
                      FOR THE YEAR ENDED DECEMBER 31, 1999
                                     PART I

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<S>                     <C>                                                           <C>
Item 1.                 Business....................................................      3
Item 2.                 Properties..................................................     23
Item 3.                 Legal Proceedings...........................................     23
Item 4.                 Submission of Matters to Vote of Security Holders...........     23

                                           PART II

Item 5.                 Market for Registrant's Common Equity and Related
                        Stockholder Matters.........................................     24
Item 6.                 Selected Financial Data.....................................     25
Item 7.                 Management's Discussion and Analysis of Financial Condition
                        and Results of Operations...................................     26
Item 7A.                Quantitative and Qualitative Disclosures About Market
                        Risk........................................................     36
Item 8.                 Financial Statements and Supplementary Data.................     36
Item 9.                 Changes in and Disagreements With Accountants on Accounting
                        and Financial Disclosure....................................     36

                                           PART III

Item 10.                Directors and Executive Officers of the Registrant..........     37
Item 11.                Executive Compensation......................................     37
Item 12.                Security Ownership of Certain Beneficial Owners and
                        Management..................................................     37
Item 13.                Certain Relationships and Related Transactions..............     37

                                           PART IV

Item 14.                Exhibits, Financial Statements Schedules and Reports on Form
                        8-K.........................................................     37
</TABLE>

                                       2
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                                     PART I

ITEM 1. BUSINESS

    Certain statements contained in this report, including statements regarding
the development, growth and expansion of Dot Hill Systems Corp.'s ("Dot Hill" or
the Company") business, the successful integration of the operations and
businesses of Box Hill Systems Corp. ("Box Hill") and Artecon, Inc. ("Artecon"),
the intent, belief or current expectations of the Company, its directors or its
officers, primarily with respect to the future operating performance of the
Company and the products it expects to offer and other statements contained
herein regarding matters that are not historical facts, are "forward-looking"
statements within the meaning of the Private Securities Litigation Reform Act
(the "Reform Act"). Future filings with the Securities and Exchange Commission,
future press releases and future oral or written statements made by or with the
approval of the Company which are not statements of historical fact may contain
forward-looking statements under the Reform Act. Because such statements include
risks and uncertainties, actual results may differ materially from those
expressed or implied by such forward-looking statements. Some of the factors
that could cause actual results to differ materially from those expressed or
implied by such forward-looking statements are set forth at the end of this Item
1 in "Certain Risk Factors Related to the Company's Business," in the section
entitled "Management Discussion and Analysis of Financial Condition and Results
of Operations," and elsewhere throughout this Annual Report on Form 10-K.

    The Company is an independent provider of high-performance data storage and
Storage Area Network ("SAN") solutions. The Company designs, manufactures,
markets and supports data storage systems for the Open Systems computing
environment, particularly UNIX, Windows, Novell and Linux environments. The
Company's storage solutions encompass a broad range of scalable products and
services targeting high-end customers. With data becoming an increasingly
critical business tool, these customers are demanding certain characteristics in
their storage systems, particularly high reliability, availability, performance,
manageability and fault-tolerance, as well as the highest level of customer and
technical support. The Company has a history of providing high-end storage
solutions that meet these requirements by combining extensive design and
implementation experience with leading edge technologies. The Company is one of
the few in the industry to offer NEBS-certified, carrier-class storage systems.
The NEBS standard was developed by Bellcore for telephone equipment and speaks
to system ruggedness and reliability.

    Effective August 2, 1999, Box Hill and Artecon completed a merger (the
"Merger") in which the two companies were merged in a tax-free, stock-for-stock
transaction. The Merger was accounted for as a pooling-of-interests. Subsequent
to the Merger, the combined company changed its name to Dot Hill Systems Corp.
Under the terms of the merger agreement, the Company issued 8,734,523 shares of
its common stock to the former Artecon shareholders, representing 0.4 shares of
the Company's common stock in exchange for each share of Artecon common stock
outstanding. Additionally, Artecon's convertible Series A preferred shares were
converted into 719,037 shares of the Company's Common stock. The historical
financial statements of the Company have been retroactively restated to reflect
the Merger. During the third quarter of 1999, the Company recorded expenses
totaling $13.3 million related to the Merger and management's restructuring and
integration plan associated with the Merger.

    During fiscal 1997, Artecon and Storage Dimensions, Inc. ("SDI") completed a
reverse merger accounted for as a purchase of SDI by Artecon, and the surviving
company changed its name to Artecon. As such, the historical financial results
of Artecon for all years prior to the SDI merger are those of Artecon.
Additionally, in August 1997, Artecon acquired substantially all of the assets
and liabilities of Falcon Systems, Inc. The acquisition was accounted for as a
purchase.

    In the United States, the Company employs a direct marketing strategy and
targets data-intensive industries, which to date primarily include Internet
service providers (ISPs), financial services, telecommunications, health care,
government/defense and academia. Abroad, the Company sells

                                       3
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directly to end-users in certain regions, and sells through local resellers in
others. The Company has four hubs, located in Carlsbad, California, New York
City, New York, the Netherlands and Japan. The Company has other offices across
the United States, in France and in the United Kingdom. Box Hill was
incorporated in New York in April 1988 under the name Box Hill and completed its
initial public offering in September 1997 on the New York Stock Exchange under
the symbol BXH. Dot Hill remains a NYSE-listed company, but now trades under the
symbol HIL.

INDUSTRY OVERVIEW

    The rapid proliferation of new data-intensive applications, such as the
Internet, intranets, digital broadcasting, data warehousing, data mining, and
the migration of mission-critical applications off mainframe computers, has
fueled the demand for Open-Systems data storage. High-end disk storage systems,
tape backup systems and storage management software that are designed to operate
on multiple platforms increasingly are becoming a critical part of a company's
MIS system and computer purchase decisions are becoming "storage centric." In
many instances, capital expenditures on storage systems are equal to or greater
than those made on computer processing hardware. The high end of the Open
Systems market is characterized by large capacity UNIX variants such as Solaris
(Sun), HPUX (Hewlett Packard), AIX (IBM) and IRIX (SGI)) and Windows NT
(Microsoft) servers operating in multi-platform environments, generally running
mission-critical applications.

    HOST-ATTACHED STORAGE

    The Open Systems market's current host-attached storage options include disk
arrays, RAID storage systems and tape backup systems. Each of these is generally
attached to the host by a SCSI bus. SCSI, including Ultra SCSI, Ultra 2 and
Ultra 3, which were designed to transfer data at increasingly higher rates with
enhanced reliability and lower error rates, has been the interface most commonly
used in most storage systems. Fibre Channel is an emerging high-speed serial
interface that became commercially available in 1997 and has gained acceptance
since then. Fibre Channel enables the transfer of data between computers and
peripherals at increased rates and cabling lengths, and among a greater number
of hosts. Fibre Channel also enables Storage Area Networks (SAN), which
generally cannot be configured using the SCSI standard.

    SAN BASED ON FIBRE CHANNEL

    A SAN is a network that sits between servers and storage devices, and
commonly is based on the Fibre Channel protocol. SANs can be used to create
centralized pools of storage and backup devices that can be accessed at high
speeds by multiple and disparate hosts. SANs can also be used to create
redundant data paths to the same storage systems and backup devices, thereby
improving a system's fault-tolerance and transfer rates.

    The Company was among the first storage vendors to provide SANs to its
customers. In September 1999, the Company launched its new line of storage
systems, SANnet-TM-, that is engineered to operate in SAN environments. SANnet
comes bundled with SANscape, a Dot Hill-developed storage management software
package that greatly enhances the benefits and performance of SANs. While SANs
appear to be gaining industry acceptance, SAN technology is in its infancy and
the Company cannot predict the timing and magnitude of customer demand for SANs.

THE DOT HILL SOLUTION

    Dot Hill develops and markets a comprehensive range of storage systems and
backup devices designed to meet the requirements of the Open Systems market. The
Company's products and services are intended to provide users with the following
benefits:

                                       4
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    RELIABILITY

    The Company designs into its storage systems redundancy, reliability and
high-performance. Redundant components such as power inlets, fans and
controllers, are hot-swappable, which means that there are at least two of the
components in the system and customers can replace, upgrade or service the
components in the field without interrupting network activity.

    Certain of the Company's products are NEBS-certified, including the
SANnet-TM- line of systems. The NEBS (Network Equipment-Building System)
standard was created by Bellcore to ensure that telephone equipment would
continue to operate under extreme conditions. Dot Hill's NEBS-certified products
were tested on the NEBS standard by an independent, outside agency. Those tests
required that the Company's products be subjected to various extreme conditions
including: vibrations comparable to a Zone 4 earthquake; temperature
fluctuations from -5C to 50C; humidity fluctuations from 5 to 90%; airborne
contaminants comparable to a 400 mile an hour dust storm; an electrostatic
discharge of 15,000 volts, and; the need to self extinguish when on fire.

    CAPACITY AND DENSITY

    The Company's disk storage systems scale from a few hundred gigabytes (GB)
up to seven terabytes (TB) in a single 72" cabinet. The Company's tape backup
solutions scale from a few hundred GBs up to 41.2TBs in a library. The Company
believes that its new SANnet line of storage systems is among the densest in the
industry. The SANnet 2200 can house ten drives in a single, 3u enclosure. The
SANnet 3200 and 4200 can house ten drives plus two, hot-swappable and redundant
hardware RAID controllers in a single 4u enclosure.

    ALL-ENCOMPASSING SOLUTIONS.

    The Company delivers all-encompassing solutions and professional services,
including design consulting, installation, integration, training, and 24-hour,
post-sales service and technical support, as well as software-based management
tools. The Company employs a full staff of applications engineers to assist
customers in making appropriate and effective storage system purchases and in
addressing, analyzing and solving complex, pre-deployment storage issues. The
Company believes this value-added capability fosters customer loyalty and allows
the Company to identify emerging customer requirements.

    MULTI-PLATFORM SUPPORT.

    As an independent provider of storage products, Dot Hill is well positioned
to provide storage solutions on a variety of platforms including UNIX, Windows,
Linux and Novell. The Company's new SANnet line of systems supports multiple
servers operating on different platforms simultaneously. This cross-platform
capability allows customers to standardize on a single storage system that can
readily be reconfigured and re-deployed at minimal cost as the customer's
operating systems or other Open Systems components change.

    SCALABILITY

    The Company's products are designed to be flexible and modular, thereby
allowing the Company to size and configure storage systems to meet the specific
requirements of individual customers. This modular architecture also allows the
Company to expand or reconfigure a customer's system as the customer's needs
change, thereby allowing customers to retain capital value in their underlying
systems.

    MANAGEABILITY

    The Company believes that the ability to manage storage systems,
particularly through storage management software, is becoming a key
differentiation among storage vendors. The Company has a

                                       5
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team of software engineers focused on software management efforts. The Company's
storage management software offerings enable customers to more easily manage,
configure and respond to their systems. SANpath and SANscape, the Company's
recently introduced software products, offer various management tools,
including: automatic balancing of data loads among multiple data paths;
automatic routing of data from non-functioning paths; LUN-masking; remote
monitoring of multi-site systems; and remote configuration of multi-site
systems.

PRODUCTS AND SYSTEMS

    The Company sells storage in two fundamental ways: as solution packages or,
for those customers who prefer to buy particular products, as modular building
blocks. Either way, Dot Hill's storage solutions range from SCSI Disk Array
configurations to multi-terabyte Ultra2 RAID storage systems to Fibre
Channel-based SANs. Dot Hill's backup solutions incorporate "best of breed" tape
libraries and backup management software, most of which is manufactured and
developed by third parties.

    In September 1999, the Company launched a new line of storage systems,
SANnet-TM-, which comes bundled with a new storage management software offering
SANscape-TM-. The Company also offers legacy products from Artecon and Box Hill.
Both the new SANnet line and the legacy lines are flexible and highly scalable.

    SANNET-TM- PRODUCT LINE.

    SANnet is the Company's new line of SAN-ready disk storage solutions,
designed with the reliability, flexibility, and performance necessary to meet
the needs of today's data-intensive, Internet-generation applications. SANnet
solutions support single or multiple servers simultaneously and are compatible
with many of today's popular Open Systems server platforms. The Company offers
SANnet storage systems in many topologies, including SCSI, Ultra3, and Fibre
Channel. All critical components of the SANnet systems, including RAID
controllers, battery backups and power supplies, are hot-swappable, redundant
and field-replaceable, which allows for upgrades and servicing to occur without
server interruptions.

        SANNET 4200 is a carrier-class RAID storage system for one-to-many
    servers. Featuring Fibre Channel technology, SANnet 4200 provides transfer
    rates up to 400MB/s on multiple loops and support for RAID levels 0, 1, 0+1,
    3 and 5. The SANnet 4200 supports single or multiple servers simultaneously
    and supports a number of operating systems including UNIX, Windows NT,
    Windows 2000 and Linux. Each system can hold from 3 to 10 drives, and store
    27GB to 3.7 TB of data.

        SANNET 3200 is a carrier-class RAID storage solution for single or dual
    servers. Using Ultra2 LVD technology, this product provides transfer rates
    up to 160MB/s on dual loops and supports RAID levels 0, 1, 0+1, 3 and 5.
    Each system can hold from 3 to 10 drives, and store 27GB to 3.7 TB of data.

        SANNET 2200 is a carrier-class RAID storage solution for single servers.
    Using Ultra3 LVD technology, SANnet 2200 supports dual-channel transfer
    rates up to 320MB/son dual loops. SANnet 2200 works directly with Windows,
    Solaris, or Linux server operating systems as a JBOD (Just a Bunch of Disks)
    or as expansion chassis in conjunction with a 3200 or 4200 RAID subsystem.
    Each system holds 1 to 10 drives and has a capacity of 9GB to 730GBs of
    data.

                                       6
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    SANMAN-TM- SUITE OF SOFTWARE

    The Company's SANman suite of software consists of two key software packages
developed by Dot Hill, SANpath-TM- and SANscape-TM-

        SANPATH-TM- helps to ensure availability and also failover and failback
    of data across a SAN and enhances network-server bandwidth by balancing data
    loads among functioning data paths and automatically routing data away from
    non-functioning paths. Once a non-functioning path is healed, the software
    automatically re-balances the data load. SANpath also enables modifications
    to the SAN without server restarts, and provides LUN Masking capabilities.

        SANSCAPE-TM- is a Java-based software utility that combines SAN
    configuration, maintenance, and monitoring tools into a single, application.
    SANscape allows customers to administer Dot Hill's storage systems located
    worldwide from a single console by sending system information across the
    Internet, intranets, or telephone lines. SANscape also notifies customers of
    issues with their systems by email, beeper or other means and allows for
    remote configuration and trouble-shooting through an interactive GUI.

    TANNET-TM- PRODUCT LINE.

    TANnet is the Company's line of back-up solutions. A TANnet solution
consists of the tape libraries of third parties, including StorageTek and
Qualstar, and backup management software of third parties including Veritas and
Legato. The solution may also consist of routers, and nearly always involves the
Company's professional services experts. TANnet offerings include the following.

        THE L700-TM- LIBRARY, when equipped with the new Fibre 9840 Eagle-TM-
    tape drives, is the first all-Fibre Channel Automated Tape Storage Solution.
    A single L700 library accepts multiple tape drive types as well as mixed
    media. This library offers flexible connectivity, high speed robotics, and
    data management.

        QUALSTAR AIT: The AIT-TM- line of tape libraries is comprised of ten
    models with capacities from 500GB to over 36TB of data and can store 50GB
    per tape at 6MB/sec native, or over 43GB/hour per tape drive with
    compression.

    PROFESSIONAL SERVICES

    Dot Hill's team of applications engineers offers professional services
designed to maximize a customer's investment in their Dot Hill solutions.
Professional Services will assess a customer's needs through a pre-sales
evaluation; custom tailor a solution design that is pre-tested in Dot Hill's
Customer Integration Lab; install the solution; and provide training, giving
clients the option to operate, service and support their system.

    LEGACY PRODUCTS

    The Company will continue to offer a number of legacy products developed by
Box Hill and Artecon prior to the Merger. Those products include, but are not
limited to, the following:

        THE FIBREBOX-REGISTERED TRADEMARK- (NOW CALLED SANNET 6008) is a Fibre
    Channel storage system for single to multiple servers. It offers capacity up
    to 400GB per unit and 6.25TB per arbitrated loop, and offers transfer rates
    up to 200MB/s with dual loops. SANnet 6008 is designed to support
    controller-less RAID using Dot Hill's FBAE-TM- software. All active
    components are hot-swappable, redundant and field-replaceable. Each system
    holds from 1 to 8 drives.

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        THE LYNXARRAY II is a NEBS-certified Fibre Channel-compatible RAID
    storage system that comes in two models: High Performance and High Capacity.
    The High Performance system uses a dual-channel backplane and supports up to
    16 disk drives with a capacity of up to 576 GB. The High Capacity system
    uses a single-channel backplane and supports up to 43 disk drives with a
    capacity of 1.55TB. Both systems can achieve aggregate transfer rates of up
    to 200 MB/s and come with the option of redundant RAID controllers which
    support RAID levels 0, 1, 0+1, 3 and 5.

CUSTOMERS

    Dot Hill markets its products principally to high-end users in the Open
Systems market. The Company has installed storage systems primarily in
data-intensive industries in which customers require reliable, high-performance,
high-availability storage solutions, such as ISPs, financial services,
telecommunications, health care, government/defense and academia.

    Since the Merger, the Company's strategy has been to target customers that
are running Internet-generation applications, which the Company defines as
applications that are related to the Internet or have arisen during this time of
the Internet, such as digital broadcasting and video editing. The Company
historically has targeted ISPs, financial services and telecommunications
companies, and a material portion of the Company's net revenues to date has been
derived from sales to customers in those industries. Direct sales to customers
in the financial services and telecommunications industries were approximately,
18% and 21%, respectively, of Dot Hill's 1999 net revenues. Direct sales to
customers in the financial services and telecommunications industries were
approximately 27% and 20%, respectively, of 1998 net revenues and 21% and 24%,
respectively, of 1997 net revenues.

    Historically, a material percentage of the Company's net revenues in each
year have been derived from a limited number of customers. For the years ended
December 31, 1999, 1998 and 1997, the Company's top five customers, including
distributors, accounted for approximately 25%, 22% and 19%, respectively, of the
Company's net revenues. Sales to one customer, Uunet Technologies, Inc.
accounted for 10% of the Company's net revenue for the year ended December 31,
1999; no sales to one customer exceeded 10% of total net revenue for the years
ended December 31, 1998 and 1997. The Company generally does not enter into
long-term contracts with its customers, and customers generally have certain
rights to extend, delay or cancel the shipment of their orders without penalty.

    A significant amount of the Company's revenues to date have been
concentrated in the UNIX marketplace, and within the UNIX marketplace, a
significant portion of the Company's revenues are associated with versions of
UNIX manufactured by Sun Microsystems, Inc.

SALES AND MARKETING

    During 1999, the Company began to focus on Internet-generation applications,
which the Company defines as Internet-related storage applications and those
applications that have arisen during this time of the Internet, such as digital
broadcasting and video editing. Historically, the Company has focused on ISPs,
financial service providers and telecommunication companies. The Company
complements its sales force with applications engineers, who generally are
highly qualified storage experts. As of December 31, 1999, the Company employed
22 applications engineers, both domestically and internationally, to provide a
variety of Professional Services to customers, including pre-sales and
pre-deployment consulting, installation services, training and support.

    Feedback from the applications engineers allows the Company to better
identify emerging customer requirements for future data storage products. Design
engineers also receive feedback from the Company's technical support, marketing
managers and production engineering teams, which helps contribute to the
quality, manufacturability and usability of products from design to deployment.

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    DOMESTIC SALES AND MARKETING

    The Company's domestic marketing strategy is to sell directly to end-users.
As of December 31, 1999, the Company's domestic sales team consisted of 64 sales
and support employees, 15 marketing employees, and 35 technical service and
support employees. There are seven sales offices located in the United States,
and a number of sales representatives work from their homes to cover a local
territory. Domestic sales represented approximately 88%, 94%, and 89% of the
Company's net revenues for 1999, 1998, and 1997, respectively. The vast majority
of the Company's domestic sales are made directly to end-users.

    INTERNATIONAL SALES AND MARKETING

    The Company's international marketing strategy is to sell directly to
end-users in certain regions and to use local distributors in others. The
Company provides marketing and technical support services in connection with
international sales. As of December 31, 1999, the Company's international sales
team consisted of 19 sales employees and 13 technical service and support
employees. There are six international Dot Hill sales offices: two in the United
Kingdom, two in Japan, one in the Netherlands and one in France. The Company's
distributors are located in approximately twenty different countries.
International sales represented approximately 12%, 8%, and 11% of the Company's
net revenues for 1999, 1998, and 1997, respectively.

ENGINEERING AND PRODUCT DEVELOPMENT

    The Company's research, engineering and development team is focused on
developing innovative storage and SAN solutions, along with storage management
software, for the Open Systems market. The Company's areas of expertise include
UNIX, Windows and Linux driver and system software design; SAN Storage resource
management software design; data storage system design and integration;
high-speed interface design for SCSI, Ultra SCSI, Ultra2, Ultra3 and Fibre
Channel, and; design, qualification and integration of disk drives, tape drives,
robotics and other storage components. The Company has a history of industry
firsts, including the first successfully commercialized hot-swappable SCSI Disk
Array and RAID storage system for the UNIX environment, the first Fibre Channel
storage system, one of the first turnkey SAN solutions for the Open Systems
market and the first NEBS-certified line of storage systems.

    The Company generally designs its products to have a modular architecture
that can be readily modified to respond to technological developments and
paradigm shifts in the Open Systems computing environment. This flexibility also
allows the Company to focus research and development resources on specific
product innovations and advancements. The modular architecture allows solutions
to be tailored to customers' specific needs and products to be adapted to
changes in technology and in their computing environments.

    The Company is currently focusing development efforts on its SANnet-TM- line
of systems and storage management software. Projects include improvements to the
features, functions and performance of the SANnet line, and the Company's
SANpath and SANscape storage management software offerings as well as a pure
Fibre Channel hardware RAID system, which the Company expects to complete during
the first half of the year 2000. The Company has contracted with a software
engineering team in China that helps write code for the Company.

    Engineering and product development expenses of the Company (which do not
include compensation for applications and technical support engineers--such
compensation is recorded as sales and marketing expenses) for fiscal years 1999,
1998 and 1997 were $7.4 million, $9.9 million and $5.5 million, respectively. As
of December 31, 1999, the Company had 48 full-time employees engaged in
engineering research and development activities.

                                       9
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CUSTOMER SERVICE AND SUPPORT

    Dot Hill recognizes that providing comprehensive, proactive and responsive
support is essential to establishing new customer accounts and securing repeat
business. Dot Hill is committed to providing the highest levels of customer
service and support aimed at simplifying installation, reducing field failures,
minimizing system downtime and streamlining administration.

    As a standard Dot Hill service, Dot Hill technical support engineers are
available by phone on a seven-day, 24-hour basis and can offer support in a
variety of different languages. Dot Hill also offers more intensive on-site
maintenance and support programs for a quarterly or annual fee, by which the
Company will dispatch either its own technical personnel or those of a global
third-party service provider to visit customer sites typically within a few
hours.

    The Company provides standard warranties, which typically run from one to
five years, with all products sold. Under the standard warranty, the Company
typically ships replacement hardware components to customers in advance of
receiving returns of defective components. The Company occasionally issues
credit in lieu of replacing a piece of equipment. A customer may also contract
for an extended warranty on all products.

MANUFACTURING

    Dot Hill's major manufacturing is conducted in 43,000 square feet of its
70,000 square-foot facility in Carlsbad, California. The products are
manufactured in a work cell production process. The manufacturing consists of
assembling and integrating components and subassemblies into the Company's
products. Certain of those subassemblies are manufactured by independent
contractors. The units are assembled and configured to order. Before the Company
ships units, the units are subjected to a systems-level test and to firmware
revision controls to ensure performance to specification in the anticipated
end-user computing environment. Test results are identified by individual
product serial numbers and are logged to aid in technical support. The Company
strives to develop close relationships with its suppliers, exchanging critical
information and implementing joint corrective action programs to maximize the
quality of its components, reduce costs and reduce inventory investments.

    The Company believes that its current facilities and capital equipment will
be adequate to meet its manufacturing needs in the foreseeable future.

    In July 1998, Artecon earned the ISO 9002 registration from the
International Organization for Standardization for its manufacturing facility in
Carlsbad, California. The ISO 9002 certification covers the manufacture,
distribution and support of the Company's products. Attaining the certification
entailed examination of the Company's manufacturing standards and processes. The
Company must undergo periodic assessment by independent auditors in order to
retain the ISO 9002 registration. In July 1999, the Carlsbad facility passed a
registration audit. Since the Merger, the Company has transferred the
manufacture of all of its products to the Carlsbad facility.

    The Company subcontracts some of its manufacturing, such as plastic molding,
metal bending, PCB fabrication and certain assembly to qualified partners in the
United States and Asia. The Company owns the design and tools/molds associated
with the manufacture of these parts. The third parties that the Company relies
on for these production activities include, but are not limited to Dovatron for
sub-assembly work and Escon for metal-bending. If the Company were required to
have other third-parties perform various work, it may take a few months to train
the companies to perform such work, and obtain the same levels of productivity.

    The Company relies on other companies to supply certain key components of
its products and products that it re-sells. Many of these components and
third-party products are available only from limited sources in the quantities
and quality demanded by the Company. The Company purchases substantially all of
its disk drives from Seagate Technology Inc. and IBM, and substantially all of
its

                                       10
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RAID controllers from CMD Technology and Infortrend. Approximately 23%, 22%, and
32% of the Company's total raw material purchases were from Seagate,
approximately 4%, 2% and 2% from Infortrend, and approximately 1%, 1%, and 2%
from CMD for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 10% of the Company's raw material purchases in 1999 were from IBM.
The Company purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements. The
Company maintains minimum inventory levels. With respect to certain components,
such as disk drives and controllers, if Dot Hill had to seek alternative sources
of supply, the incorporation of such components from alternative suppliers and
the manufacture and shipment of the Company's products could be delayed while
modifications to such products and accompanying software were made to
accommodate the introduction of the alternative suppliers' components. The
Company estimates that replacing Infortrend and CMD's RAID controllers with
those of another supplier would involve several months of hardware and software
modification.

    The Company resells the tape libraries and other products of Storage
Technology Corporation (StorageTek), among other companies. Approximately 17%,
15%, and 6% of the Company's total purchases were for Storage Tek products for
1999, 1998, and 1997, respectively. These products were then resold to
customers. If Dot Hill were to face a shortage of StorageTek products in the
future, Dot Hill believes it could, after some modification, integrate the
products of other manufacturers into its storage solutions. However, due to the
market acceptance of StorageTek, the Company believes that a substantial number
of customers would not be satisfied with the products of an alternate
manufacturer.

COMPETITION

    The market for Open Systems storage is growing, and it is intensely
competitive. The Company competes primarily with traditional suppliers of
computer systems including, but not limited to Compaq Corporation,
Hewlett-Packard, Sun Microsystems, IBM, Hitachi and Dell Computer Corp., which
market storage systems as well as other computer products and which the Company
believes have become more focused on storage since 1998. The Company also
competes against independent storage system suppliers to the high-end Open
Systems market, including, but not limited to, EMC Corporation, Network
Appliance, Inc., Ciprico Inc., nStor Technologies, MTI Technologies, Inc, Raid
Power, Amdahl, and Storage Technologies, Inc. In providing tape backup, the
Company competes with suppliers of tape-based storage systems such as ADIC,
Datalink Corporation, MTI Technologies, Inc., Dallas Digital and Cranel, Inc.
and numerous resellers.

    Competitive pricing pressures exist in the data storage market, and have had
and may in the future have an adverse effect on the Company's revenues and
earnings. There also has been and may continue to be a willingness on the part
of certain large competitors to reduce prices in order to preserve or gain
market share. The Company believes that pricing pressures are likely to continue
as competitors develop more competitive product offerings.

    Many of the Company's current and potential competitors are significantly
larger than the Company and have significantly greater financial, technical,
marketing, purchasing and other resources than the Company, and as a result, may
be able to respond more quickly to new or emerging technologies and changes in
customer requirements, or devote greater resources to the development, promotion
and sale of products than the Company, or to deliver competitive products at a
lower end-user price. The Company also expects that competition will increase as
a result of industry consolidations. Current and potential competitors have
established or may establish cooperative relationships among themselves or with
third parties to increase the ability of their products to address the needs of
the Company's prospective customers. Accordingly, it is possible that new
competitors or alliances among competitors may emerge and rapidly acquire
significant market share. Increased competition is likely to result in price
reductions, reduced operating margins and loss of market share, any of which
could have a material adverse effect on the Company's business, operating
results or financial condition.

                                       11
<PAGE>
PROPRIETARY TECHNOLOGY AND INTELLECTUAL PROPERTY

    Dot Hill's success depends significantly upon its proprietary technology.
The Company has limited patent protection for its products and has attempted to
protect its intellectual property rights primarily through copyrights, trade
secrets, employee and third-party nondisclosure agreements and other measures.
The Company seeks to protect its software, documentation and other written
materials under trade secret and copyright laws, which afford only limited
protection. The Company generally enters into confidentiality agreements with
its employees and with key vendors and suppliers. As of December 31, 1999, the
Company had been awarded a total of seven U.S. patents covering certain elements
of its products. There are no assurances that the seven aforementioned patents
will provide the Company with competitive advantages or will not be challenged
by third parties.

    The patents of others may have a material adverse effect on the Company's
ability to do business. The Company expects that competitors in the storage
system market will increasingly be subject to infringement claims as the number
of products and competitors in the market grows. Although Dot Hill believes that
its products and trade designations do not infringe on the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future. From time to time, the
Company receives letters from patent owners asserting possible infringement and
request to explore a licensing relationship. In 1999, the Company received two
such letters. There can be no assurance that the Company will be able to
successfully defend against any such assertion or obtain a license to use such
technology or that a license could be obtained on terms that would not have a
material adverse effect on the Company. If the Company or its suppliers are
unable to license protected technology, the Company could be prohibited from
marketing products that incorporate such technology. The Company could also
incur substantial costs to redesign its products or to defend any legal action
taken against it. Should the Company's products be found to infringe protected
technology, Dot Hill could be required to pay damages to the infringed third
party or be enjoined from manufacturing and selling such products.

    The Company has registered numerous trademarks and will continue to evaluate
the registration of additional trademarks as appropriate. Recently, the Company
applied for registered trademark protection for the marks SANman-TM-,
SANnet-TM-, SANpath-TM-, SANscape-TM-, "the storage in.com-TM-, Dot Hill and the
Dot Hill logo. The Company claims common law protection for and may seek to
register many other marks.

    Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
Dot Hill's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not independently develop similar technology,
duplicate the Company's products or design around patents issued to the Company
or the intellectual property rights of the Company.

                                       12
<PAGE>
EMPLOYEES

    As of December 31, 1999, Dot Hill had a total of 329 employees,
substantially all of whom are full-time. 48 employees were engaged in
engineering, research and development; 52 in applications and technical support
engineering and customer support; 111 in marketing and sales; 81 in
manufacturing; and 37 in general management and administration.

    The Company's future operating results depend in significant part upon its
ability to attract, train, retain and motivate qualified management, technical,
manufacturing, sales and support personnel for its operations, which has been
particularly difficult recently due, in part, to Merger-related restructuring
activities, the enhanced recruiting efforts of competitors, and the generally
low unemployment rates. The Company provides equity incentives, in addition to
salary and benefits, to attract and retain qualified employees. Most members of
the sales force are compensated in a manner that includes a commission-based
component.

EXECUTIVE OFFICERS OF THE REGISTRANT AT DECEMBER 31, 1999

<TABLE>
<CAPTION>
NAME                      AGE                        POSITION                     OFFICER SINCE
----                    --------   ---------------------------------------------  --------------
<S>                     <C>        <C>                                            <C>
Philip Black..........     44      Co-Chief Executive Officer, Executive Vice     May 1995
                                     President of International Sales and
                                     Director
James L. Lambert......     46      Co-Chief Executive Officer, Chief Operating    August 1999
                                     Officer, President and Director
Preston Romm..........     46      Chief Financial Officer, Treasurer and         November 1999
                                   Assistant Secretary
Benjamin Monderer.....     41      Executive Vice President of Applications       April 1988
                                     Engineering, Professional Services and
                                     Director
Dana Kammersgard......     44      Chief Technical Officer                        August 1999
</TABLE>

    All officers are elected by the Board of Directors and serve at the pleasure
of the Board of Directors as provided in the By-laws.

    PHILIP BLACK has served as Co-Chief Executive Officer, Executive Vice
President of International Sales and a Director of the Company since the Merger.
Prior to the Merger, Mr. Black was Chief Executive Officer and a Director of Box
Hill, and held those positions since joining Box Hill in May 1995. From
April 1994 until he joined the Company, Mr. Black was President and Chief
Executive Officer of Chevry, a backup software company. From September 1991
until June 1994, Mr. Black served as the Chief Executive Officer and Treasurer
of Avalon Control Technologies, a company specializing in products and services
related to Echelon's LONWorks technology. From March 1990 until August 1991,
Mr. Black served as Managing Director of Echelon Europe, of which he was a
co-founder. From 1976 to 1991, Mr. Black held a number of positions, including
Vice President, President, Chief Executive Officer and Vice Chairman of the
Board, at Tekelec, Inc., a publicly traded company of which he was the founder,
engaged in the design, manufacturing and marketing of diagnostics systems and
network switching solutions.

    JAMES L. LAMBERT has served as Director, President, Chief Operating Officer
and Co-Chief Executive Officer of the Company since the Merger. A founder of
Artecon, Mr. Lambert served as President, Chief Executive Officer and Director
of Artecon from its inception in 1984 until the Merger. From 1979 to 1984,
Mr. Lambert served in various positions at CALMA, a division of General Electric
Company, most recently from 1981 to 1984 as Vice President of Research and
Development. Mr. Lambert currently serves as a Director of the Nordic Group of
Companies, a group of privately held companies, and of Snow Valley, Inc., a
privately-held resort enterprise affiliated with the Nordic Group. He holds a
B.S. and a M.S. in Civil and Environmental Engineering form the University of
Wisconsin, Madison.

                                       13
<PAGE>
    PRESTON ROMM joined the Company in November 1999 as Vice President of
Finance and Chief Financial Officer. From January 1997 to November 1999,
Mr. Romm was Vice President of Finance, Chief Financial Officer and Secretary of
Verteq, Inc., a privately held semiconductor equipment manufacturer. From
November 1994 to January 1997, Mr. Romm was Vice President of Finance and Chief
Financial Officer of STM Wireless, Inc. (NASD:STMI), a wireless data and voice
equipment manufacturer. From July 1990 to November 1994, Mr. Romm was Vice
President and Controller of MTI Technology Corporation (NASD:MTIC), a provider
of data storage systems. Mr. Romm has over 20 years of experience as a financial
executive at high technology companies. Mr. Romm holds a B.S. from the
University of Maryland and an M.B.A. from American University.

    DR. BENJAMIN MONDERER, ENG.SC.D. has served as Executive Vice President of
Applications Engineering/Professional Services and a Director of the Company
since the Merger. Dr. Monderer was a co-founder of Box Hill, as well as
President and a Director since Box Hill's incorporation in 1988. He became
Chairman of the Board of Box Hill in July 1997. Dr. Monderer was a member of the
technical staff at Hewlett-Packard in 1980 and 1981, and was a Research
Scientist at Columbia University from 1986 to 1989. Dr. Monderer holds a
Bachelor of Science in Electrical Engineering from Princeton University and a
Master of Science degree in Electrical Engineering and a Doctor of Engineering
Science from Columbia University.

    DANA KAMMERSGARD has served as Chief Technical Officer since the Merger.
Mr. Kammersgard was a founder of Artecon and served as a director from its
inception in 1984 until the Merger. At Artecon, he served in various positions
since 1984 including Secretary and Senior Vice President of Engineering from
March 1998 until August 1999 and as Vice President of Sales and Marketing from
March 1997 until March 1998. Prior to co-founding Artecon, Mr. Kammersgard was
the Director of Software development at CALMA, a division of General Electric
Company. Mr. Kammersgard holds a B.A. in Chemistry from the University of
California, San Diego.

CERTAIN RISK FACTORS RELATED TO THE COMPANY'S BUSINESS

    In addition to those risks identified elsewhere in this Annual Report on
Form 10-K and other filings such as the registration/joint proxy statement filed
in connection with the Merger, the Company's business and results of operations
are subject to numerous risks and uncertainties, including the following.

    THE OPEN SYSTEMS STORAGE MARKET IS RAPIDLY CHANGING IN MANY WAYS AND DOT
     HILL MAY BE UNABLE TO KEEP PACE OR PROPERLY PREPARE FOR THE EFFECTS OF
     THOSE CHANGES.

    The Open Systems data storage market in which Dot Hill operates is
characterized by rapid technological change, frequent new product introductions
and evolving industry standards. Customer preferences in that market are
difficult to predict and changes in those preferences could render Dot Hill's
current or future products unmarketable. The introduction of products embodying
new technologies by Dot Hill's competitors and the emergence of new industry
standards also could render existing products as well as new products, such as
the SANnet line of systems, obsolete and unmarketable. For example, if customers
were to turn away from open systems computing in general, or fail to embrace the
Company's SANnet line of systems in particular, Dot Hill's revenue would decline
dramatically.

    The success of Dot Hill depends upon its ability to address the increasingly
sophisticated needs of customers, to enhance existing products and to develop
and introduce, on a timely basis, new competitive products (including new
software and hardware, and enhancements to existing software and hardware) that
keep pace with technological developments and emerging industry standards. If
the Company cannot successfully identify, manage, develop, manufacture or market
product enhancements or new products, its business will be materially and
adversely affected.

                                       14
<PAGE>
    A number of mergers and acquisitions have taken place among open systems
storage companies recently, and that type of activity may continue. Such
corporate transactions may quickly and unpredictably alter the market, including
the competitive landscape and the availability of key components and third party
products. Such constant changes make accurate predictions difficult.

    THE LOSS OF ONE OR MORE SUPPLIERS COULD ADVERSELY AFFECT DOT HILL'S ABILITY
     TO MANUFACTURE AND SELL PRODUCTS.

    The Company relies on other companies to supply certain key components of
its products and products that it re-sells. Many of these components and
third-party products are available only from limited sources in the quantities
and quality demanded by the Company. The Company purchases substantially all of
its disk drives from Seagate Technology Inc. and IBM, and substantially all of
its RAID controllers from CMD Technology and Infortrend. Approximately 23%, 22%,
and 32% of the Company's total raw material purchases were from Seagate,
approximately 4%, 2% and 2% from Infortrend, and approximately 1%, 1%, and 2%
from CMD for the years ended December 31, 1999, 1998 and 1997, respectively.
Approximately 10% of the Company's raw material purchases in 1999 were from IBM.
The Company purchases substantially all of its raw materials pursuant to
purchase orders, rather than pursuant to long term purchase agreements. The
Company maintains minimum inventory levels.

    There is currently a significant market demand for disk drives, tape drives
and RAID controllers, and from time to time the Company may experience component
shortages, selective supply allocations and increased prices of such components.
With respect to certain components, such as disk drives and controllers, even if
alternative sources of supply became available, the incorporation of such
components from alternative suppliers could delay the manufacture and shipment
of the Company's products while modifications to such products and accompanying
software were made to accommodate the introduction of the alternative suppliers'
components. The Company estimates that replacing Infortrend and CMD's RAID
controllers with those of another supplier would involve several months of
hardware and software modification.

    The Company subcontracts some of its manufacturing, such as plastic molding,
metal-bending, PCB fabrication and certain assembly to qualified partners in the
United States and Asia. The Company owns the design and tools/molds associated
with the manufacture of these parts. The third parties that the Company relies
upon for these various production activities includes, but is not limited to,
Dovatron for sub-assembly work and Escon for metal-bending. If the Company were
required to have alternate third-parties perform various manufacturing
activities, it may take a few months to train the companies and obtain the same
levels of productivity.

    The Company resells the tape libraries and other products of Storage
Technology Corporation (StorageTek), among other companies. Approximately 17%,
15%, and 6% of the Company's total purchases were for Storage Tek products for
1999, 1998, and 1997, respectively. If Dot Hill were to face a shortage of
StorageTek products in the future, Dot Hill could, after some modification,
integrate the products of other manufacturers into its storage solutions.
However, due to the market acceptance of StorageTek, the Company believes that a
substantial number of customers would not be satisfied with the products of an
alternate manufacturer.

    DOT HILL MAY HAVE DIFFICULTY PREDICTING RESULTS AND MAY EXPERIENCE OPERATING
     LOSSES, EITHER OF WHICH WOULD LIKELY RESULT IN A STOCK PRICE DECLINE.

    For the years ended December 31, 1999 and 1997, the Company incurred a loss.
There can be no assurance that the Company will be profitable on a quarterly or
annual basis. If the Company is unable to generate net income from operations,
its business will be adversely affected and its stock price will likely decline.

                                       15
<PAGE>
    The Company's quarterly operating results have in the past varied and may in
the future vary significantly depending on a number of factors, including:

    - the level of competition;

    - the size, timing, cancellation or rescheduling of significant orders;

    - product configuration, mix and any quality issues;

    - market acceptance of new products and product enhancements such as the new
                  SANnet line of systems; new product announcements or
      introductions by competitors;

    - deferrals of customer orders in anticipation of new products or product
      enhancements;

    - changes in pricing by the Company or its competitors;

    - the ability of the Company to develop, introduce and market new products
      and product enhancements on a timely basis;

    - hardware component costs and availability, particularly with respect to
      hardware             components obtained from sole sources;

    - hardware supply constraints;

    - the company's success in expanding its sales and marketing programs;

    - technological changes in the open systems storage market;

    - levels of expenditures on research and development;

    - changes in the Company's strategy;

    - personnel changes; and

    - general economic trends and other factors.

    Sales for any future quarter are not predictable with any significant degree
of certainty. The Company generally operates with limited order backlog because
its products typically are shipped shortly after orders are received. Further,
the Company does not enter into long-term purchase contracts with customers, and
customers have certain rights to extent or delay shipment of their orders, as
well as the right to return products and cancel orders in some circumstances. As
a result, sales in any quarter are generally dependent on orders booked and
shipped in that quarter. Sales are also difficult to forecast because the open
systems storage market is rapidly evolving and the Company's sales cycles vary
substantially from customer to customer. Further, the Company has recently
launched a new line of products and is actively trying to move customers from
legacy products to this new product line which may effect sales cycles and the
predictability of orders. Due to the unpredictable timing of customer orders,
the Company may ship products representing a significant portion of its net
sales for a quarter during the last month of that quarter. Any significant
deferral of these sales could have a material adverse effect on the results of
operations in any particular quarter. To the extent that the Company completes
significant sales earlier than expected, operating results for subsequent
quarters may be adversely affected. The Company's expense levels will be based,
in part, on its expectations as to future sales. As a result, if sales levels
are below expectations, net income may be disproportionately affected. There can
be no assurance that the Company will experience sales growth with respect to
its legacy and new line of products in future periods.

    Fluctuating operating results may increase the likelihood of the Company
becoming involved in expensive, time-consuming litigation. In 1998, a class
action lawsuit was filed against Box Hill Systems Corp., certain of its officers
and directors, and the underwriters of the Company's initial public offering
alleging certain violations of the federal securities laws. See "Item 3 -- Legal
Proceedings." If the

                                       16
<PAGE>
Company is not successful in defending this suit or any other suit that may
arise, or if the Company incurs greater expenses than it expects in defending
any suits, the Company's operating results for one or more quarters, as well as
the price of the Company's common stock, could be materially adversely affected.

    Since the Company has undergone a number of mergers and acquisitions over
the last few years, period-to-period comparisons of its results of operations
are not necessarily meaningful and should not be relied upon as an indicator of
future performance. It is possible that in future quarters the Company's
operating results may be below the expectations of analysts and investors. In
such event, the price of the Company's common stock would likely be materially
and adversely affected.

    AN ECONOMIC DOWNTURN IN AN INDUSTRY IN WHICH THE COMPANY CONCENTRATES COULD
     MATERIALLY AND ADVERSELY AFFECT REVENUES.

    Dot Hill's revenues to date have been derived primarily from sales to
customers in the financial services and telecommunications industries. Direct
sales to customers in the financial services and telecommunications industries
were approximately 18% and 21%, respectively, of Dot Hill's 1999 net revenues,
27% and 20%, respectively, of 1998 net revenues and 21% and 24%, respectively,
of 1997 net revenues.

    Historically, a material percentage of the Company's net revenues in each
year has been derived from a limited number of customers. For the years ended
December 31, 1999, 1998 and 1997, the Company's top five customers, including
distributors, accounted for approximately 25%, 22% and 19%, respectively, of the
Company's net revenues. Sales to one customer, Uunet Technologies, Inc.
accounted for 10% of the Company's net revenue for the year ended December 31,
1999. Sales to any one customer did not exceed 10% of total new revenue for the
years ended December 31, 1998 and 1997. The Company generally does not enter
into long-term contracts with its customers, and customers generally have
certain rights to extend, delay or cancel the shipment of their orders without
penalty.

    A very significant portion of the Company's revenues to date has been
concentrated in the UNIX marketplace, and within the UNIX marketplace, a
significant portion of the Company's revenues are associated with versions of
UNIX manufactured by Sun Microsystems, Inc. If Sun Microsystems were to change
its policy of supporting open systems computing environments, and if Dot Hill's
products were thereby rendered incompatible with Sun Microsystems' products, Dot
Hill's business, financial position and results of operation would be materially
and adversely affected.

    The Company expects that a high percentage of the Company's sales for the
foreseeable future will continue to come from a relatively small number of
customers. There can be no assurance that orders from existing customers will
continue at their historical levels, or that the Company will be able to obtain
orders from new customers. An economic downturn in any industry targeted by the
Company, or the loss of one or more customers, particularly a significant
customer, could result in a material decrease in revenues, thereby adversely
affecting Dot Hill's business.

    BECAUSE THE COMPANY GENERALLY DOES NOT ENTER INTO LONG-TERM CONTRACTS WITH
     ITS CUSTOMERS AND SALES CYCLES CAN BE LENGTHY, DELAYS OR CANCELLATIONS OF
     CUSTOMER ORDERS COULD MATERIALLY AND ADVERSELY AFFECT DOT HILL'S OPERATING
     RESULTS.

    The Company generally does not enter into long-term volume purchase
contracts with its customers, and customers generally have certain rights to
extend or to delay the shipment of their orders. The Company's distributors and
value added resellers (VARs) may also carry competing product lines and could
reduce or discontinue sales of the Company's products, which could have a
material adverse effect on the Company's operating results. Although the Company
believes that it provides adequate allowances for product returns, there can be
no assurance that actual returns will not exceed recorded allowances which could
have a material adverse effect on the Company's operating

                                       17
<PAGE>
results. In addition, there can be no assurance that existing end-user customers
will not purchase their storage equipment from the manufacturer that provides
their network computing systems and, as a result, reduce or eliminate purchases
from the Company. The loss of one or more of the Company's current customers,
particularly a principal customer, or cancellation or rescheduling of orders
already placed, could materially and adversely affect the Company's business,
operating results or financial condition.

    Customer orders for the Company can range in value from a few thousand
dollars to over a million dollars. The length of time between initial contact
with a potential customer and sale of a product, or "sales cycle," also can vary
greatly and can be as long as three to twenty-four months. This is particularly
true for the sale and installation of complex, turnkey solutions, which often
are sold directly to end users, and for new products, such as SANnet. Revenue
for Dot Hill is likely to be affected by the timing of large orders, which makes
it difficult for the Company to predict such revenue. Revenue for a quarter
could be reduced if large orders forecasted for a certain quarter are delayed or
are not realized.

    The factors that could delay or defer an order, particularly orders for new
products such as the SANnet line of systems, include:

    - time needed for technical evaluations by customers;

    - customers' budget restrictions and changes to budgets during the course of
      the sales cycle;

    - customer internal review and testing procedures; and

    - engineering work needed to integrate a storage solution with a customer's
      system.

    DOT HILL'S BUSINESS WILL MATERIALLY SUFFER IF IT ENCOUNTERS SIGNIFICANT
     PRODUCT DEFECTS.

    Storage system products like those offered by the Company may contain
undetected software errors or failures when first introduced or as new versions
are released. There can be no assurance that, despite testing, errors will not
be found in products after shipments (particularly new products such as the
SANnet line of systems), resulting in a loss of or delay in market acceptance,
which could have a material adverse effect on the Company's business, operating
results or financial condition. The Company's standard warranty provides that if
the system does not function to published specifications the Company will repair
or replace the defective component without charge. Significant warranty costs,
particularly those that exceed reserves, could have a material adverse effect on
the Company's business.

    Although the Company has not received any product liability claims to date,
the sale and support of products by the Company and the incorporation of
products from other companies may entail the risk of such claims. A successful
product liability claim against the Company could have a material adverse effect
on the Company's business, operating results or financial condition.

    DOT HILL HAS RECENTLY LAUNCHED A NEW LINE OF PRODUCTS AND IS ENCOURAGING
     CUSTOMERS TO MOVE FROM LEGACY PRODUCTS TO THE NEW LINE, WHICH ENTAILS MANY
     RISKS AND UNCERTAINTIES.

    The Company has recently introduced a number of new products including its
SANnet line of systems and two software packages, SANman and SANscape. The
Company is actively encouraging customers to move from the Company's various
legacy products to the new product lines. These activities entail a number of
risks and uncertainties all of which could have a material and adverse affect on
the Company's business. Those risks and uncertainties include, but are not
limited to, the following:

    - customer orders may be delayed while customers evaluate new products;

                                       18
<PAGE>
    - customers may be disturbed by Company actions to encourage the use of the
      new products and they may turn away from the Company;

    - the new line of products may contain defects or bugs that are not yet
      known to the Company, but that come to light after shipment of products
      has occurred;

    - customers may turn away from the new products;

    - the Company likely will find it more difficult to accurately predict
      future financial performance.

    DOT HILL'S BUSINESS WILL BE MATERIALLY AND ADVERSELY AFFECTED IF IT CANNOT
     ATTRACT OR RETAIN KEY PERSONNEL.

    The Company's future performance depends in significant part upon the
continued service of its senior management and key personnel. The Company
provides incentives such as salary, benefits and option grants (which are
typically subject to vesting over four years) to attract and retain qualified
employees. In recent periods, the Company has experienced difficulties retaining
existing and attracting and training new, skilled personnel. Any inability to
attract, train and retain skilled sales personnel in future periods or the loss
of the services of one or more of the Company's officers or other key employees
could have a material adverse effect on the Company's business, operating
results or financial condition. Competition for such personnel is intense, and
there can be no assurance that the Company can retain its key technical and
management employees or that it can attract, assimilate or retain other highly
qualified technical and management personnel in the future.

    THE COMPUTER STORAGE MARKET IS HIGHLY COMPETITIVE.

    The storage system market is intensely competitive. The Company competes
with various companies, including, but not limited to: Hewlett Packard, Sun
Microsystems, IBM, Hitachi, Compaq Corporation, and Dell Computer Corp., which
market storage systems as well as other computer products, and which have become
more focused on storage during the past few years. The Company also competes
against independent storage system suppliers to the high-end market including,
but not limited to: Network Appliance, nStor Technologies, Ciprico, StorageTek,
Procom Technology Inc., Storage Computer Corporation, Storage Works, MTI
Technology and EMC Corporation. In providing tape backup, the Company competes
with suppliers of tape-based storage systems including, but not limited to: ADIC
Datalink Corporation, MTI Technologies, Dallas Digital, Cranel, Inc. and others.

    Many of these competitors are significantly larger than Dot Hill and have
significantly greater name recognition, engineering, manufacturing and marketing
capabilities, and greater financial and personnel resources than the Company. As
a result, competitors may be able to respond more quickly to new or emerging
technologies and changes in customer requirements, or devote greater resources
to the development, promotion and sale of products than the Company, or to
deliver competitive products at a lower end-user price.

    The Company also expects that competition will increase as a result of
industry consolidations. Current and potential competitors have established or
may establish cooperative relationships among themselves or with third parties
to increase the ability of their products to address the needs of the Company's
prospective customers. Accordingly, it is possible that new competitors or
alliances among competitors may emerge and rapidly acquire significant market
share. Increased competition is likely to result in price reductions, reduced
operating margins and loss of market share, any of which could have a material
adverse effect on the Company's business, operating results or financial
condition. In fact, competitive pricing pressures have had, and may continue to
have, an adverse effect on Dot Hill's revenue and earnings.

    The Company believes that the principal competitive factors affecting its
markets include: fault-tolerance reliability, performance, ease of use,
scalability, manageability, price and customer service and support. There can be
no assurance that the Company will be able to successfully incorporate these

                                       19
<PAGE>
factors into its products and to compete against current or future competitors
or that competitive pressures faced by the Company will not materially and
adversely affect its business, operating results or financial condition.

    If Dot Hill is unable to develop and market products to compete with the
products of competitors, the Company's business will be materially and adversely
affected. In addition, if major customers who are competitors cease purchasing
Dot Hill products so that they can concentrate on sales of their own products,
the Company's business will be adversely affected.

    Dot Hill sells its products through distributors and value added resellers
(VARs) internationally and, to a lesser extent, domestically. These VARs and
distributors may also carry competing product lines, and could reduce or
discontinue sales of the Dot Hill's products, which could have a material
adverse effect on operating results. In addition, the Company cannot assure that
existing end-user customers will not purchase storage equipment from the
manufacturer that provides their network computing systems and, as a result,
reduce or eliminate purchases from Dot Hill.

    DOT HILL'S INTERNATIONAL BUSINESS ACTIVITIES SUBJECT IT TO RISKS THAT COULD
     ADVERSELY AFFECT BUSINESS.

    Dot Hill's international sales represented approximately 12% of net revenues
in 1999 and the Company currently has sales offices in Japan, France, England
and the Netherlands. Dot Hill believes that continued growth and profitability
will require expansion of international operations, particularly in Europe and
the Pacific Rim. The Company's international operations are subject to a variety
of risks associated with conducting business internationally, including the
following, any of which could have a material adverse effect on business,
operating results and financial condition:

    - longer payment cycles;

    - unexpected changes in regulatory requirements;

    - import and export restrictions and tariffs, and increases in tariffs,
      duties, price controls or other restrictions on foreign currencies;

    - the burden of complying with a variety of foreign laws;

    - potentially adverse tax consequences;

    - currency exchange rate fluctuations;

    - the imposition of trade barriers or price controls;

    - political and economic instability abroad;

    - difficulties in staffing and managing international operations;

    - seasonal reductions in business activity during the summer months in
      Europe and other times in other parts of the world; and

    - problems in collecting accounts receivable.

    A portion of the Company's international business is presently conducted in
currencies other than the U.S. dollar. Foreign currency transaction gains and
losses arising from normal business operations are credited to or charged
against earnings in the period incurred. As a result, fluctuations in the value
of the currencies in which the Company conducts its business relative to the
U.S. dollar will cause currency transaction gains and losses, which Dot Hill has
experienced in the past and continues to experience. Due to the substantial
volatility of currency exchange rates, among other factors, the Company cannot
predict the effect of exchange rate fluctuations upon future operating results.
There can be no assurance that the Company will not experience currency losses
in the future. The Company

                                       20
<PAGE>
has not previously undertaken hedging transactions to cover its currency
exposure but may hedge a portion of its currency exposure in the future as
management deems appropriate.

    Proprietary rights and intellectual property may be more difficult to
protect outside of the United States. Also, the Company has limited experience
in marketing and distributing its products internationally. Dot Hill cannot be
certain that it will be able to successfully grow its international presence in
a timely manner, which could have a material adverse effect on the business,
operating results and financial condition of the Company.

    DOT HILL'S LACK OF INTELLECTUAL PROPERTY PROTECTION AND CLAIMS OF PATENT
     INFRINGEMENT MAY MATERIALLY AND ADVERSELY AFFECT THE COMPANY'S BUSINESS.

    Dot Hill's success depends significantly upon its proprietary technology.
The Company has limited patent protection for its products and has attempted to
protect its intellectual property rights primarily through copyrights, trade
secrets, nondisclosure agreements and other measures. The Company seeks to
protect its software, documentation and other written materials under trade
secret and copyright laws, which affords only limited protection. The Company
generally enters into confidentiality agreements with its employees and with key
third parties. As of December 31, 1999, the Company had been awarded a total of
seven U.S. patents covering certain elements of its products. The Company does
not have any patents pending or current plans to seek additional patents at this
time. There are no assurances that the seven aforementioned patents will provide
the Company with competitive advantages or will not be challenged by third
parties.

    The patents of others may have a material adverse effect on the Company's
ability to do business. The Company expects that competitors in the storage
system market will increasingly be subject to infringement claims as the number
of products and competitors in the market grows. Although Dot Hill believes that
its products and trade designations do not infringe on the proprietary rights of
third parties, there can be no assurance that third parties will not assert
infringement claims against the Company in the future. From time to time, the
Company receives letters from patent owners that indicate a possible
infringement and request to explore a licensing relationship. In 1999, the
Company received two such letters. If such inquiries result in the lodging of a
more formal claim, the Company will evaluate the claim as it relates to its
products and, if appropriate, may seek a license to use the protected
technology. There can be no assurance that the Company will be able to obtain a
license to use such technology or that a license could be obtained on terms that
would not have a material adverse effect on the Company. If the Company or its
suppliers are unable to license protected technology, the Company could be
prohibited from marketing products that incorporate such technology. The Company
could also incur substantial costs to redesign its products or to defend any
legal action taken against it. Should the Company's products be found to
infringe protected technology, Dot Hill could be required to pay damages to the
infringed party or be enjoined from manufacturing and selling such products.

    The Company has registered numerous trademarks and will continue to evaluate
the registration of additional trademarks as appropriate. Recently, the Company
has applied for registered trademark protection for the marks SANman-TM-,
SANnet-TM-, SANpath-TM-, SANscape-TM-, "the storage in.com-TM-, Dot Hill and the
Dot Hill logo. The Company claims common law protection for and may seek to
register many other marks.

    Despite the Company's efforts to protect its proprietary rights,
unauthorized parties may attempt to copy aspects of the Company's products or to
obtain and use information that the Company regards as proprietary. In addition,
the laws of some foreign countries do not protect proprietary rights to as great
an extent as do the laws of the United States. There can be no assurance that
Dot Hill's means of protecting its proprietary rights will be adequate or that
the Company's competitors will not

                                       21
<PAGE>
independently develop similar technology, duplicate the Company's products or
design around patents issued to the Company.

    IF WE HAVE NOT ADEQUATELY PREPARED FOR THE TRANSITION TO YEAR 2000, OUR
     BUSINESS, OPERATING RESULTS AND FINANCIAL CONDITION COULD SUFFER.

    We have executed a plan designed to make our computer systems, applications,
computer and manufacturing equipment and facilities Year 2000 ready. To date,
none of our systems, applications, equipment or facilities have experienced
material difficulties from the transition to Year 2000, nor have we been
notified that any of our suppliers have had any such difficulties. However, due
to the breadth of potential issues related to the Year 2000, we cannot guarantee
that we will not experience any problems in the future and the final
determination may take several months. Where practicable, we have attempted to
mitigate our risks with respect to any failures of our critical external
suppliers related to the Year 2000. The effect on our results of operations from
any failure of our systems, applications, equipment or facilities, or our
critical external suppliers, related to the Year 2000 issue cannot yet be
determined

    THE COMPANY'S EXECUTIVE OFFICERS AND DIRECTORS AND THEIR AFFILIATES OWN MORE
     THAN HALF OF THE COMPANY'S OUTSTANDING SHARES, WHICH COULD PREVENT A CHANGE
     IN CONTROL OF THE COMPANY, AND ADVERSELY AFFECT DOT HILL'S STOCK PRICE.

    As of March 2000, the Company's executive officers, directors and their
affiliates beneficially owned approximately 54% of the Company's outstanding
shares of common stock. As a result, these stockholders, if acting together,
would be able to influence matters requiring approval by the stockholders of the
Company, including the election of a majority of the directors. The voting power
of these stockholders under certain circumstances could have the effect of
delaying or preventing a change in control of the Company.

    Further, the Company's Certificate of Incorporation, as amended, and Bylaws,
as amended, contain a number of provisions that could impede a takeover or
change in control of the Company, including but not limited to a classified
Board of Directors. If the shareholders adopt various proposals at the next
annual meeting of the shareholders scheduled for May 8, 2000, the newly adopted
Certificate of Incorporation and Bylaws will contain other provisions that could
impede a takeover or change in control of the Company, including but not limited
to the elimination of the stockholders' ability to take action by written
consent and a fair price requirement and the elimination of the ability of
stockholders to remove a director from office without cause.

    The Board of Directors may issue additional shares of Common Stock or
establish one or more classes or series of Preferred Stock up to 5,000,000
shares (10,000,000 shares if shareholders adopt a particular proposal at the
next annual shareholders meeting scheduled for May 8, 2000), designations,
relative voting rights, dividend rates, liquidation and other rights,
preferences and limitations as determined by the Board without stockholder
approval.

    Each of the foregoing provisions gives the Board, acting without stockholder
approval, the ability to prevent, or render more difficult or costly, the
completion of a takeover transaction that stockholders might view as being in
their best interests.

    OUR STOCK PRICE IS VOLATILE.

    The market price of the Company's common stock has been, and is expected to
continue to be, volatile. This volatility may result from a number of factors,
including fluctuations in the Company's quarterly revenues and net income,
announcements of products by the Company or its competitors, and conditions in
the Open Systems storage market. Also, the stock market has experienced and
continues to experience extreme price and volume fluctuations which have
affected the market prices of

                                       22
<PAGE>
securities, particularly those of technology companies, and which often have
been unrelated to the operating performance of the companies. These broad market
fluctuations, as well as general economic and political conditions, may
adversely affect the market price of the Company's Common Stock in future
periods. Stock price volatility may increase the likelihood of the Company
becoming involved in expensive, time-consuming litigation. In 1998, a class
action lawsuit was filed against Box Hill Systems Corp., certain of its officers
and directors, and the underwriters of the Company's initial public offering
alleging certain violations of the federal securities laws. See "Item 3 -- Legal
Proceedings."

ITEM 2. PROPERTIES:

    Dot Hill's headquarters and ISO 9002 certified manufacturing operations are
located in approximately 70,000 square feet of space in Carlsbad, California,
including approximately 43,000 square feet of manufacturing space. This facility
is leased through December 2001. The Company also has a major office in New York
City, which consists of approximately 52,000 square-feet of space and is
occupied under a long-term lease expiring in 2007. In addition, the Company
leases six offices throughout the United States, as well as offices in Japan,
France England and the Netherlands. The aggregate rent for the year ended
December 31, 1999 for all facilities was approximately $2.0 million The Company
believes that its existing facilities have the capacity to double their current
production and therefore are adequate to meet its current needs.

ITEM 3. LEGAL PROCEEDINGS:

    The Company is subject to a class action lawsuit filed against Box Hill
Systems Corp., certain of its officers and directors, and the underwriters of
the Company's September 16, 1997 initial public offering (the "Offering"). The
lawsuit is proceeding in the United States District Courts for the Southern
District of New York. The action was filed on December 4, 1998 on behalf of
purchasers of the stock of the Company during the period from September 16, 1997
to April 14, 1998. Plaintiffs allege that, in violation of federal securities
laws, defendants made misrepresentations of material fact and omitted material
facts required to be disclosed in the Company's registration statement and
prospectus issued in connection with the Offering and in statements allegedly
made by the Company and certain of its officers and directors subsequent to the
Offering. The lawsuit is in the discovery phase, the deadline for which is
currently scheduled for March 31, 2000.

    The Company believes that it has meritorious defenses to plaintiffs' claims
and intends to vigorously defend against those claims. However, the Company
expects to incur significant legal expense in 2000 defending this litigation.
Such defense costs, and other amounts incurred in connection with this
litigation, will be expensed as incurred and will reduce the Company's 2000
results.

    In addition to the complaints discussed above, the Company is subject to
various other legal proceedings and claims against the Company, asserted or
unasserted, which arise in the ordinary course of business. While the outcome of
the claims against the Company cannot be predicted with certainty, such
litigation and claims may have a material adverse effect on the Company's
financial position or results of operations.

ITEM 4. SUBMISSION OF MATTERS TO VOTE OF SECURITY HOLDERS

    None

                                       23
<PAGE>
                                    PART II

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

    The Company's common stock has been listed on the New York Stock Exchange
since September 16, 1997.

    The following table sets forth, for the fiscal quarters indicated, the range
of high and low sale prices per share of the Company's common stock as reported
on the New York Stock Exchange.

<TABLE>
<CAPTION>
QUARTERLY PERIOD                                                HIGH       LOW
----------------                                              --------   --------
<S>                                                           <C>        <C>
Fiscal Year Ended December 31, 1999
  1st Quarter...............................................   $ 7.13     $4.00
  2nd Quarter...............................................     6.38      4.50
  3rd Quarter...............................................     8.18      5.00
  4th Quarter...............................................     7.13      4.63

Fiscal year ended December 31, 1998
  1st Quarter...............................................   $14.25     $9.50
  2nd Quarter...............................................    13.88      6.63
  3rd Quarter...............................................     9.13      6.13
  4th Quarter...............................................     8.50      4.81
</TABLE>

    As of March 20, 2000, there were 5,657 holders of record of the Company's
common stock.

    The Company has never paid any cash dividends on its common stock, and
currently intends to retain future earnings, if any, to fund the development and
growth of its business. The Company does not anticipate paying any cash
dividends in the foreseeable future.

    The last sales price for the Company's common stock, as reported by the New
York Stock Exchange on March 20, 2000 was $13.69.

    During the period covered by this Annual Report on Form 10-K, the Company
did not issue or sell any equity securities that were not registered under the
Securities Act of 1933, as amended.

                                       24
<PAGE>
ITEM 6. SELECTED FINANCIAL DATA

    The accompanying historical financial statements of Dot Hill have been
retroactively restated to reflect the Merger of Box Hill and Artecon, which was
accounted for as a pooling of interests. The financial statements for the year
ended December 31, 1999 reflect the results of Dot Hill from the August 2, 1999
Merger date through December 31, 1999, in addition to the combined results of
Box Hill and Artecon from January 1, 1999 through the Merger date. The financial
statements for the years ended December 31, 1998, 1997, 1996, and 1995 combine
the results of operations of Box Hill for each of the years then ended with the
results of operations of Artecon for the fiscal years ended March 31, 1999,
March 31, 1998, March 29, 1997 and March 30, 1996 respectively. The following
financial information should be read in conjunction with the Company's financial
statements and related notes thereto and with "Management Discussion and
Analysis of Financial Condition and Results of Operations" included elsewhere in
this Annual Report on Form 10-K. As a result of changing Artecon's fiscal
year-end from March 31 to conform with the Company's December 31 year-end,
Artecon's results of operations for the three months ended March 31, 1999 are
identical in the combined results of operations for both the years ended
December 31, 1999 and 1998 and is reflected as an adjustment in the consolidated
statements of shareholders equity. Artecon's total revenue and net income for
this period were $18.3 million and $1.7 million, respectively. Artecon's cash
flows used in operating, investing, and financing activities for this period
were $2.6 million, $39,000 and $1.8 million, respectively.

             SELECTED HISTORICAL CONSOLIDATED FINANCIAL INFORMATION
                     (IN THOUSANDS, EXCEPT PER SHARE DATA)

<TABLE>
<CAPTION>
                                                                    YEARS ENDED DECEMBER 31,
                                                      ----------------------------------------------------
                                                        1999       1998     1997(2)      1996       1995
                                                      --------   --------   --------   --------   --------
                                                            (IN THOUSANDS, EXCEPT PER SHARE AMOUNTS)
<S>                                                   <C>        <C>        <C>        <C>        <C>
INCOME STATEMENT DATA:
Net revenues........................................  $124,216   $168,355   $136,684   $105,344   $87,397
Gross margin........................................    37,604     58,591     40,211     29,925    28,613
Operating expenses:
  Selling and marketing.............................    24,204     34,839     18,121     12,968    10,078
  Engineering and product development...............     7,401      9,946      5,523      4,463     3,039
  General and administrative........................    10,837      9,981      7,049      4,011     3,927
  Shareholder officer's compensation................        --      1,275      7,538      6,347     9,067
  Impairment of intangible assets...................     1,224        867         --         --        --
  Merger and restructuring expense..................     7,392      1,404         --         --        --
  Acquired in-process research and development......        --         --     18,200         --        --
                                                      --------   --------   --------   --------   -------
Operating income (loss).............................   (13,454)       279    (16,220)     2,136     2,502
Net income (loss)...................................  $ (9,047)  $    584   $(14,230)  $  1,467   $ 1,622
                                                      ========   ========   ========   ========   =======
Basic net income (loss) per share(1)................  $  (0.39)  $   0.03   $  (1.06)  $   0.12   $  0.14
                                                      ========   ========   ========   ========   =======
Diluted net income (loss) per share(1)..............  $  (0.39)  $   0.02   $  (1.06)  $   0.10   $  0.12
                                                      ========   ========   ========   ========   =======
</TABLE>

<TABLE>
<CAPTION>
                                                                          DECEMBER 31,
                                                      ----------------------------------------------------
                                                        1999       1998       1997       1996       1995
                                                      --------   --------   --------   --------   --------
<S>                                                   <C>        <C>        <C>        <C>        <C>
BALANCE SHEET DATA:
Cash, cash equivalents and short-term investments...  $ 47,951   $ 59,807   $ 58,194   $  1,740   $ 4,271
Working capital.....................................    58,946     78,867     74,259     32,510    14,041
Total assets........................................   103,658    127,030    131,162     14,879    28,327
Total long-term debt................................       272     11,908     10,484      2,921     2,941
Total stockholders' equity..........................    72,823     79,964     78,227     13,866    12,663
</TABLE>

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

(1) See Note 1 of Notes to Consolidated Financial Statements of Dot Hill Systems
    Corp. for the three years in the period ended December 31, 1999 for an
    explanation of shares used in computing basic and diluted net income (loss)
    per share.

(2) Concurrent with the initial public offering of Box Hill in 1997, the Company
    terminated its status as an S Corporation. Had the Company been a C
    Corporation for the entire year, the proforma net loss and net loss per
    basic and diluted share would have been $15,924 and $1.18, respectively,
    based on the tax laws in effect during the period. The proforma information
    presented in this paragraph is unaudited.

                                       25
<PAGE>
ITEM 7. MANAGEMENT'S DISCUSSION AND ANALYSIS OF FINANCIAL CONDITION AND RESULTS
  OF OPERATIONS

    The following discussion of the financial condition and results of
operations of the Company should be read in conjunction with the consolidated
financial statements and the related notes thereto included herein. The
discussion in this Annual Report on Form 10-K contains forward-looking
statements that involve risks and uncertainties. The Company's actual results
could differ materially from those discussed in the forward-looking statements.
Factors that could cause or contribute to such differences include, without
limitation, those discussed in this section and the section entitled "Business,"
as well as those discussed elsewhere in this Annual Report on Form 10-K.

OVERVIEW

    The Company designs, manufactures, markets and supports high performance
data storage systems for the Open Systems computing environment. In the United
States, the Company employs a direct marketing strategy aimed at data-intensive
industries which, to date, include financial services, telecommunications,
internet service providers, multimedia, healthcare, government/defense and
academia. The Company's international strategy is to sell directly to end users
in certain regions, and to use local distributors in others. The Company focuses
on providing storage solutions to high-end customers, primarily in the UNIX,
Windows, Linux and Novell environment. The Company's strategy is to leverage its
expertise as a company focused exclusively on storage solutions.

    Effective August 2, 1999, Box Hill and Artecon completed a Merger in which
the two companies were merged in a tax-free, stock-for-stock transaction. The
Merger was accounted for as a pooling-of-interests. The combined company changed
its name to Dot Hill Systems Corp. Under the terms of the merger agreement, the
Company issued 8,734,523 shares of its common stock to the former Artecon
shareholders, representing .4 shares of the Company's common stock in exchange
for each share of Artecon common stock outstanding. Additionally, Artecon's
convertible preferred Series A shares were converted into 719,037 shares of the
Company's common stock. The historical financial statements of the Company have
been restated to reflect the Merger.

    During fiscal 1997, Artecon and SDI completed a reverse merger whereby SDI
acquired Artecon for legal and tax purposes. For financial reporting purposes,
the SDI merger was accounted for as an acquisition of SDI by Artecon, and, as
such, the historical financial results of Artecon for all years prior to the SDI
merger, which are included within the accompanying supplemental consolidated
financial statements, are those of Artecon. The SDI/Artecon combination was
accounted for as a purchase and the purchase price included an allocation to
goodwill and other intangible assets of $7.4 million. Additionally, in
August 1997, Artecon acquired substantially all of the assets and liabilities of
Falcon. The acquisition was accounted for as a purchase and the purchase price
included an allocation to goodwill and other intangible assets of $638,000.

    The Company's manufacturing operations consist primarily of the assembly and
integration of components and subassemblies into the Company's products, with
certain of those subassemblies manufactured by independent contractors. The
Company's operations are primarily conducted from its facilities in California
and New York City. Generally, the Company extends to its customers the
warranties provided to the Company by its suppliers. To date, the Company's
suppliers have reimbursed the majority of the Company's warranty costs. On a
quarterly and annual basis the Company's gross margins have been and will
continue to be affected by a variety of factors, including competition, product
configuration, product mix, the availability of new products and product
enhancements, and the cost and availability of components.

    Competitive pricing pressures exist in the data storage market, and have had
and may in the future continue to have an adverse effect on the Company's
revenue and earnings. The Company believes that pricing pressures are likely to
continue as competitors develop more competitive product offerings.

                                       26
<PAGE>
    Box Hill completed an initial public offering of its common stock on
September 16, 1997. The offering consisted of the sale of 5,500,000 shares of
common stock at $15.00 per share, of which 3,300,000 were issued and sold by the
Company and 2,200,000 shares were sold by individuals who were the founders and
sole shareholders of the Company prior to the initial public offering.
Additionally, 825,000 shares of common stock were purchased from the Company at
$15.00 per share by the underwriters upon the exercise of an over-allotment
option. The net proceeds to Box Hill, after deducting estimated underwriting
discounts and offering expenses, were approximately $56.6 million.

    The Company markets and distributes its products and services through its
direct sales force employed in 7 domestic offices and 6 overseas sales offices
located in Japan, France, England and the Netherlands. Domestically, the vast
majority of the Company's sales are made directly to end-users. Internationally,
the Company teams up with local resellers in certain regions, and sells directly
to end-users in other regions. Revenue generated from product sales is
recognized upon shipment. Revenue generated from service contracts is recognized
ratably over the term of the contract. Operating expenses consist primarily of
rent, payroll, commissions, other selling and administrative expenses, and
research and development costs, and are recognized in the period incurred. The
following table sets forth certain items from Dot Hill's consolidated statement
of operations as a percentage of net sales for the periods indicated:

<TABLE>
<CAPTION>
                                                             YEAR ENDED DECEMBER 31
                                                         ------------------------------
                                                           1999       1998       1997
                                                         --------   --------   --------
<S>                                                      <C>        <C>        <C>
Net Revenues...........................................   100.0%     100.0%     100.0%
Gross Margin...........................................    30.3       34.8       29.4
Operating expenses
  Selling and service..................................    19.5       20.7       13.3
  Engineering and product development..................     6.0        5.9        4.0
  General and Administration...........................     8.7        5.9        5.2
  Shareholder officers' compensation...................      --         .8        5.5
  Impairment of intangible assets......................     1.0         .5         --
  Merger and restructuring expenses....................     6.0         .8         --
  Acquired in-process research and development.........      --         --       13.3
Operating income (loss)................................   (10.9)        .2      (11.9)
Net income (loss)......................................    (7.3)%       .3%     (10.4)%
</TABLE>

RESULTS OF OPERATIONS

YEAR ENDED DECEMBER 31, 1999 COMPARED TO YEAR ENDED DECEMBER 31, 1998.

    NET REVENUES.

    Net revenues reflect the invoiced amounts for products shipped less reserves
for estimated returns and revenues from service contracts. Net revenues for the
year ended December 31, 1999 were $124.2 million compared to $168.4 million for
the year ended December 31, 1998 a decrease of approximately 26.2%. The decrease
in net revenues is primarily attributable to a decrease in volume of sales
coupled with price reductions. Comparisons of the Company's 1999 and 1998
results are difficult due to the significant corporate restructuring that the
Company and Artecon have undergone over the last several years, including the
Merger, and Artecon's acquisition of Storage Dimensions in March 1998 and of
Falcon in August 1997. The decrease in net revenue was due in part to the
Company's focus on the Merger and integration and restructuring issues, efforts
to merge the sales and product lines of Artecon and Box Hill, and the
unwillingness of certain customers to purchase storage products due to Year 2000
concerns. For 1999, sales of SCSI-based solutions were 64% of revenues, sales of
backup solutions were 15% of revenues, services were 10% of revenues, and sales
of other products and services were approximately 11% of revenues.

                                       27
<PAGE>
    GROSS MARGIN.

    Gross margin for 1999 was $37.6 million, or 30.3% of net revenues, compared
to a gross margin of $58.6 million, or 34.8% of net revenues, for 1998. The
decrease in gross margin as a percentage of net revenues from 1998 to 1999 was
primarily attributable to a $5.0 million inventory write-down associated with
the Company's product line consolidation and as a result of related price
reductions. Excluding inventory write downs of $5.0 million and $403,000 for
1999 and 1998, respectively, gross margin was 34.3% of net revenues for 1999
compared to 35.0% of net revenues for 1998.

    SALES AND MARKETING EXPENSES.

    Selling and marketing expenses are comprised primarily of salaries,
commissions and marketing costs. Selling and marketing expenses decreased to
$24.2 million for 1999 from $34.8 million for 1998. The decrease in selling and
marketing expenses was primarily due to a decrease in the direct sales force and
field service staff as a result of Artecon's restructuring and operational
consolidations, which took place in fiscal 1998 after Artecon's merger with
Storage Dimensions. As a percentage of net revenues, sales and marketing
expenses decreased to 19.5% for 1999 from 20.7% in 1998, primarily as a result
of the decreases in personnel noted above.

    ENGINEERING AND PRODUCT DEVELOPMENT EXPENSES.

    Engineering and product development expenses are comprised primarily of
prototype expenses, salaries for employees directly engaged in research and
other costs associated with product development. Research and development
expenses decreased to $7.4 million for 1999 compared to $9.9 million for 1998.
The decrease in research and development expenses is primarily attributable to
Artecon's restructuring and operation consolidations in fiscal 1998. As a
percentage of net revenues, engineering and product development increased
slightly to 6.0% for 1999 compared to 5.9% for 1998.

    GENERAL AND ADMINISTRATIVE EXPENSES.

    General and administrative expenses are comprised primarily of compensation
and overhead costs associated with Dot Hill's finance and administrative staff.
General and administrative expenses, including shareholder officers
compensation, for 1999 were $10.8 million, or 8.7% of net revenues, compared to
$11.3 million, or 6.7% of net revenues, for 1998. The decrease in general and
administrative expenses is primarily attributable to the restructuring and
operational consolidation which took place in 1998 after Artecon's merger with
Storage Dimensions and at Dot Hill after the Merger.

    MERGER AND RESTRUCTURING EXPENSES AND IMPAIRMENT OF INTANGIBLE ASSETS.

    During the third quarter of 1999, and in connection with the Merger, the
Company recorded expenses totaling $13.4 million related to the Merger and
management's restructuring and integration plan associated with the Merger, as
follows:

<TABLE>
<CAPTION>
                                                              (IN THOUSANDS)
<S>                                                           <C>
Inventory write-downs, reported with cost of goods sold.....     $ 5,033
Professional fees...........................................       4,029
License termination.........................................       1,000
Employee termination costs..................................       1,100
Write-down of intangibles...................................         937
Facility closures and related costs.........................         647
Other integration costs.....................................         616
                                                                 -------
    Total...................................................     $13,362
                                                                 =======
</TABLE>

                                       28
<PAGE>
    Management's restructuring and integration plan relates primarily to the
consolidation and discontinuance of product lines, which resulted in inventory
and intangible assets write-downs of $5.0 million and $937,000 respectively. As
a result of the product line consolidation, the Company also terminated a
license agreement with a third-party vendor, resulting in license termination
costs of $1.0 million. Additionally, management's plan includes consolidating
the Company's manufacturing operations and other functions into the Company's
headquarters in Carlsbad, California, which resulted in employee termination
charges of $1.1 million, consisting primarily of severance payments for 38
employees, facility closure costs of $647,000 and other integration costs of
$616,000. The Company completed the plan during the fourth quarter of 1999. The
major components of the charges and the remaining accrual balance as of
December 31, 1999 are as follows:

<TABLE>
<CAPTION>
                                                                          ACCRUED
                                                                       RESTRUCTURING
                                                 EXPENSES     PAID         COSTS
                                                 --------   --------   -------------
                                                           (IN THOUSANDS)
<S>                                              <C>        <C>        <C>
Professional services..........................   $4,029    $(4,029)      $   --
License termination............................    1,000     (1,000)          --
Employee termination costs.....................    1,100       (620)         480
Facility closures and related costs............      647       (125)         522
Other integration costs........................      616       (526)          90
                                                  ------    -------       ------
    Total......................................   $7,392    $(6,300)      $1,092
                                                  ======    =======       ======
</TABLE>

    The Company anticipates that the remaining merger and restructuring costs
liability at December 31, 1999, which consists primarily of employee termination
costs and lease and contract termination costs, will be paid in 2000 and
believes that there are no unresolved issues or additional liabilities that may
result in an adjustment to the merger and restructuring charge.

    In December 1998, the Artecon Board of Directors approved a plan to
consolidate one of Artecon's engineering facilities from Milpitas, California,
to Carlsbad, California, to consolidate certain domestic sales and service
locations, and to eliminate certain product lines and development activities.
Artecon recorded pre-tax restructuring charges of $1.8 million to cover the
costs associated with these actions. Such charges consisted primarily of
employee termination costs, inventory write-downs, facility closures and related
expenses, intangible asset impairment and tooling machinery write-offs.

    Employee termination costs consisted primarily of severance payments for 43
employees, all of whom were terminated as of December 31, 1998. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. Inventory
write-downs and the tooling write-off primarily related to the discontinuance of
certain low-volume and low-profit product lines. Of the total restructuring
charge associated with the inventory write-downs, $403,000 was included as a
separate component of cost of sales in the accompanying financial statements.
Facility closures and related expenses consisted of lease termination costs and
the write-off of certain property and equipment disposed of associated with the

                                       29
<PAGE>
closures. The major components of the charges and the reconciliation of the
expenses and accrual activity during 1998 and 1999 was as follows:

<TABLE>
<CAPTION>
                                                                      ACCRUED                     ACCRUED
                                                        AMOUNTS    RESTRUCTURING    AMOUNTS    RESTRUCTURING
                                          INITIAL      UTILIZED      COSTS AT      UTILIZED      COSTS AT
                                       RESTRUCTURING   IN FISCAL   DECEMBER 31,    IN FISCAL   DECEMBER 31,
                                          CHARGE       YEAR 1998       1998        YEAR 1999       1999
                                       -------------   ---------   -------------   ---------   -------------
                                                                  (IN THOUSANDS)
<S>                                    <C>             <C>         <C>             <C>         <C>
Employee termination costs...........     $  254        $  (200)       $ 54          $ (54)        $ --
Inventory write-downs................        403           (115)        300           (300)          --
Facility closures and related
  expenses...........................        715           (476)        239           (239)          --
Tooling write-off....................        135           (123)         --             --           --
Intangible asset impairment..........        300           (300)         --             --           --
                                          ------        -------        ----          -----         ----
    Total............................     $1,807        $(1,214)       $593          $(593)        $ --
                                          ======        =======        ====          =====         ====
</TABLE>

    In connection with the acquisitions of Falcon and SDI, Artecon allocated
$420,000 and $1.6 million, respectively, to an assembled workforce intangible
asset. Artecon recorded an impairment of these intangible assets of $300,000
during the year ended December 31, 1998, which has been included as a component
of the restructuring charge, as the impairment was a direct result of employee
terminations associated with restructuring activities. Furthermore, as a result
of significant attrition and terminations of employees, which had been utilized
as the basis for the assembled workforce valuation, Artecon recognized
additional amortization of $287,000 in 1999 based on the specific attrition and
termination of additional employees who had been the basis for the valuation of
the assembled workforce intangible asset.

    In connection with the merger with SDI, Artecon recorded a reserve for
acquisition related costs of $6.6 million, of which $661,000 was outstanding at
December 31, 1998. All of the acquisition related costs were included in the
purchase price allocation performed during 1997. The major components of the
reserve and the reconciliation of the accrual activity during 1998 and 1999 was
as follows:

<TABLE>
<CAPTION>
                            INITIAL MERGER                   ACCRUED MERGER                   ACCRUED MERGER
                                 COSTS          AMOUNTS           COSTS          AMOUNTS           COSTS
                          (DECEMBER 31, 1997)   UTILIZED   (DECEMBER 31, 1998)   UTILIZED   (DECEMBER 31, 1999)
                          -------------------   --------   -------------------   --------   -------------------
                                                             (IN THOUSANDS)
<S>                       <C>                   <C>        <C>                   <C>        <C>
Employee termination
  costs (80
  employees)............         $2,923         $(2,761)           $162           $(162)            $ --
Professional service
  fees..................          2,225          (1,909)            316              --              316
Other costs.............          1,433          (1,250)            183            (117)              66
                                 ------         -------            ----           -----             ----
    Total...............         $6,581         $(5,920)           $661           $(279)            $382
                                 ======         =======            ====           =====             ====
</TABLE>

    The Company anticipates that the remaining merger costs liability at
December 31, 1999, which consists primarily of miscellaneous professional
services obligations and lease and contract termination costs, will be paid in
2000 and believes that there are no unresolved issues or additional liabilities
that may result in an adjustment to the purchase price allocation for the SDI
merger.

    OTHER INCOME, NET.

    Total other income is comprised of interest income earned on the Company's
cash and cash equivalents, the majority of which is exempt from federal income
taxes, less interest expense and other expenses. Total other income for 1999 was
$1.4 million compared to $1.3 million for 1998. The increase in total other
income was primarily attributable to a reduction in interest expense associated
with repayment of Artecon's previously outstanding line of credit in the third
quarter of 1999.

                                       30
<PAGE>
    INCOME TAXES.

    The Company's effective income tax rate was (24.8)% for the year ended
December 31, 1999 compared to 62.7% for the comparable 1998 period. The 1999
effective income tax rate reflects federal, state and local taxes, offset by
non-deductible merger and restructuring expenses. The effect of state and local
taxes was 54.6% during the 1998 period as a result of the various jurisdictions
in which the Company's taxable income was earned.

    As of December 31, 1999 and 1998, the Company has federal and state net
operating losses of approximately $20.4 million and $10.2 million, which begin
to expire in the years ending 2009 and 2011, respectively. The Company also has
federal and state tax credit carryforwards of $1.2 million and $774,000,
respectively. The annual use of Artecon's federal net operating loss and credit
carryforwards is limited to an annual amount of approximately $3.0 million per
year as a result of the Merger.

YEAR ENDED DECEMBER 31, 1998 COMPARED TO YEAR ENDED DECEMBER 31, 1997

    NET REVENUE.

    Net revenue increased 23.2% to $168.4 million for the year ended
December 31, 1998, compared to $136.7 million for the year ended December 31,
1997. The increase in net revenue is primarily attributable to an increase in
volume, mostly as a result of the SDI acquisition, partially offset by price
reductions. The increase in volume was also due to increases in sales of back-up
products, Fibre Channel and RAID products, partially offset by a decrease in
sales of legacy storage products. The increase in sales of back-up products was
the result of the additional focus on backing-up mission critical data by the
Company's traditional customer base, and the successful sales efforts in
obtaining new customers requiring the Company's knowledge and experience in
back-up integration.

    GROSS MARGIN.

    Gross margin increased 45.7% to $58.6 million in 1998 from $40.2 million for
the comparable period of 1997. As a percentage of net revenues, gross profit
increased from 29.4% in 1997 to 34.8% in 1998, principally as a result of
different product mix and inventory write-offs, which adversely effected margins
in the comparable period.

    SALES AND MARKETING.

    Sales and marketing expenses increased 92.3% to $34.8 million for the year
ended December 31, 1998 from $18.1 million for the year ended December 31, 1997.
As a percentage of net revenue, sales and marketing expenses increased to 20.7%
in 1998 from 13.3% in 1997. The increase was primarily due to an increase in the
direct sales force and field service staff, increased commissions based on the
increase in sales and increased sales management overhead as a result of the SDI
acquisition.

    ENGINEERING AND PRODUCT DEVELOPMENT.

    Engineering and product development expenses increased 80.0% to
$9.9 million for the year ended December 31, 1998 from $5.5 million for the
comparable period of 1997. As a percentage of net revenue, engineering and
product development increased to 5.9% in 1998 from 4.0% in 1997. The increase is
primarily due to an increase in the number of employees engaged in research and
development activities.

                                       31
<PAGE>
    GENERAL AND ADMINISTRATIVE.

    General and administrative expenses increased 41.6% to $10.0 million for the
year ended December 31, 1998 from $7.0 million for the year ended December 31,
1997. As a percentage of net revenue, general and administrative expenses
increased to 5.9% in 1998 from 5.2% in 1997. The increase is primarily due to
additional depreciation and amortization expense of $1.5 million and
$1.7 million, respectively, for goodwill and other intangible assets associated
with the SDI and Falcon acquisitions and additional rent expense resulting from
an expanded facility in New York.

    SHAREHOLDER OFFICERS' COMPENSATION.

    Shareholder officers' compensation consists of salaries and bonuses paid to
Box Hill's three original shareholder officers. Shareholders officers'
compensation decreased 83.1% to $1.3 million for the year ended December 31,
1998, compared to $7.5 million for the year ended December 31, 1997. The
decrease in shareholder officers' compensation is attributable to new employment
agreements entered into with the shareholder officers in connection with the
Company's initial public offering.

    RESTRUCTURING EXPENSES AND IMPAIRMENT OF INTANGIBLE ASSETS.

    In December 1998, Artecon's Board of Directors approved a plan for Artecon
to consolidate one of its engineering facilities from Milpitas, California, to
Carlsbad, California, to consolidate certain domestic sales and service
locations, and to eliminate certain product lines and development activities.
The Company recorded pre-tax restructuring charges of $1.8 million to cover the
costs associated with these actions.

    In connection with Artecon's acquisitions of Falcon and SDI, Artecon
allocated $420,000 and $1.6 million, respectively, to an assembled workforce
intangible asset. Artecon recorded an impairment of these intangible assets of
$300,000 during the year ended December 31, 1998, which has been included as a
component of the restructuring charge, as the impairment was a direct result of
employee terminations associated with activities that were exited. Furthermore,
as a result of significant attrition and terminations of employees which had
been utilized as the basis for the assembled workforce valuation, Artecon
recognized a write-down of the intangible assets associated with the workforce
of $867,000.

    ACQUIRED IN-PROCESS RESEARCH AND DEVELOPMENT.

    In connection with Artecon's acquisitions of SDI and Falcon, management
determined that certain hardware and software products in development had no
future alternative use. Accordingly, Artecon recognized a charge of
$14.5 million and $3.7 million for the year ended December 31, 1997 for the
write-off of in-process research and development costs relating to the reverse
merger with SDI and the acquisition of Falcon, respectively. No such charges
were recorded for the year ended December 31, 1998.

    OTHER INCOME, NET.

    Other income increased $1.7 million to $1.3 million for the year ended
December 31, 1998 from a loss of $404,000 for the comparable period of 1997. The
increase is primarily the result of interest income earned on the proceeds from
the Company's initial public offering in September 1997 and legal settlement
income received in 1998.

    INCOME TAXES.

    The Company's effective income tax rate was 62.7% for the year ended
December 31, 1998 versus (14.4)% for the comparable period of 1997. The 1998
effective income tax rate reflects federal, state

                                       32
<PAGE>
and local taxes, partially offset by research and development credits and a tax
benefit from the Company's foreign sales corporation. The effect of state and
local taxes was 54.6% during the 1998 period as a result of the various
jurisdictions in which the Company's taxable income was earned. The 1997
effective income tax rate reflects federal, state and local taxes on Artecon's
taxable income, the Dot Hill C Corporation's pro rata portion of Dot Hill's 1997
taxable income, state franchise taxes, a one-time tax benefit of $855,000
related to the recognition of the net deferred tax asset recorded by Dot Hill
upon terminating its S Corporation status and the impact of non-deductible
charges for acquired in-process research and development.

LIQUIDITY AND CAPITAL RESOURCES

    As of December 31, 1999, the Company had $48.0 million of cash and cash
equivalents and short-term investments. As of December 31, 1999, working capital
was $58.9 million.

    For the year ended December 31, 1999, cash used in operating activities was
$747,000 compared to cash provided by operating activities of $1.3 million for
the same period in 1998. The decrease in net cash provided by operating
activities is primarily attributable to the net loss of $9.0 million offset by a
reduction in inventories and accounts receivable in 1999.

    Cash used by investing activities in 1999 consisted of $896,000 of purchases
of property and equipment compared to cash provided by investing activities of
$4.6 million in 1998 as a result of sales of short-term investments of
$5.8 million offset by $1.2 million of property and equipment purchases.

    Cash used in financing activities was $11.8 million for 1999 as a result of
payment of Artecon's outstanding debt, partially offset by $359,000 from the
exercise of stock options under the Company's 1995 Stock Incentive Plan and the
Company's 1997 Employee Stock Purchase Plan.

    In May 1998, Artecon entered into a revolving credit facility with LaSalle
National Bank (the "line of credit") which permits borrowings of up to
$15,000,000. Subsequent to the Merger on August 2, 1999, the Company repaid all
outstanding debt under this credit facility.

    The Company's Japanese subsidiary has two lines of credit with a Japanese
bank for borrowings of up to an aggregate of 35 million Yen (approximately US
$343,000 at December 31, 1999) at interest rates ranging from 1.8% to 2.5%.
Interest is due monthly, with principal due and payable on various dates through
August 2005. Borrowings are secured by the inventories of the Japanese
subsidiary. As of December 31, 1999, the total amount outstanding under the
three credit lines was 28 million Yen (approximately US $272,000 at
December 31, 1999).

    In August 1997, prior to the Merger, Artecon acquired Falcon Systems for
$3.5 million. That purchase price included $1.0 million in cash and a promissory
note in the original principal amount of $1.3 million, which was later amended
by Artecon and Falcon to $750,000 (the "Artecon Note"). Concurrently, Falcon
transferred the Falcon Technology to Founding Partners, a California general
partnership ("Founding Partners"), in exchange for a promissory note with a
principal amount of $1.8 million (the "Founding Partners Note"). Dana
Kammersgard, James Lambert and W.R. Sauey, each of whom is an executive officer
and/or director of the Company, were the general partners of Founding Partners.
Founding Partners was considered a "special purpose entity" and, accordingly,
has been consolidated with the Company for financial reporting purposes. The
purchase price of Falcon consisted of $10.2 million for other assets acquired,
$638,000 for goodwill and other tangible assets, $14.1 million for liabilities
assumed and in-process research and development expenses of $3.7 million, which
had no future alternative use, based on management assumptions. Under the terms
of the Artecon Note and the Founding Partners Note (collectively, the "Notes"),
Artecon and Founding Partners were required to make monthly payments to Falcon
of $15,935 and $37,182, respectively, through August 2002. Each of the Notes
bore interest at the rate of 10% per annum. After the Merger

                                       33
<PAGE>
in August 1999, the Company paid the Notes in full and payments to Founding
Partners were discontinued. On December 27, 1999, Founding Partners was
dissolved.

    In connection with the Falcon acquisition and the transfer of Falcon's
technology to Artecon, Artecon and Founding Partners entered into a Technology
License Agreement, dated August 21, 1997, pursuant to which Founding Partners
granted to Artecon an exclusive, perpetual license of the Falcon technology in
exchange for monthly payments of $39,000 payable through August 2002. On
December 27, 1998, Founding Partners and Artecon amended the Technology License
Agreement to provide for, among other things, the transfer of the Falcon
technology from Founding Partners to Artecon upon the satisfaction in full of
Artecon's obligations under the Founding Partners Note. On August 2, 1999, the
Founding Partners Note was fully satisfied, and on August 9, 1999, Founding
Partners transferred all of Founding Partners' right, title and interest in the
Falcon technology to Artecon, a wholly owned subsidiary of the Company.

    In December 1998, four shareholder class action lawsuits were filed against
Box Hill, certain of its officers and directors, and the underwriters of the
Company's 1997 initial public offering (the "Offering"). The actions were filed
on behalf of purchasers of the common stock of the Company during the period
from September 16, 1997 to April 14, 1998 and allege that the Company made
misrepresentations of material fact and omitted material facts required to be
disclosed in the Company's registration statement and prospectus issued in
connection with the Offering and in statements allegedly made by the Company and
certain of its officers and directors subsequent to the Offering. The Company
believes that it has meritorious defenses to plaintiffs' claims and intends to
vigorously defend against those claims. Legal costs to defend the claims are
expected to be material and will be charged to expense as incurred.

    As of December 31, 1999, the Company's future commitments under its
operating leases totaled approximately $6.9 million.

    The Company's sales and operating results have in the past fluctuated from
quarter to quarter and may vary in the future depending on a number of factors,
including:

    - the size and timing of significant purchase orders;

    - the timing of hardware shipments by third-party vendors necessary to
      recognize revenues;

    - the Company's ability to continue to design, develop and market new
      products and services;

    - market acceptance of new products, such as the new SANnet line of systems;

    - the Company's success in increasing its domestic and foreign sales force;

    - the size and number of new accounts;

    - technological changes in the storage systems market;

    - the growth of the telecommunications and Internet/intranet industry;

    - reduction in demand for the Company's products as a result of new product
      introductions by competitors;

    - levels of expenditure on research and development;

    - the amount of additional capital needed by the Company and the timing of
      such needs;

    - product quality problems;

    - fluctuations in foreign currency exchange rates; and

    - general economic trends and other factors.

                                       34
<PAGE>
    Sales and operating results for past periods are not necessarily indicative
of future periods and a period-to-period comparison of its sales or results of
operations are not necessarily meaningful and should not be relied upon as an
indicator of future performance.

    The Company presently expects cash and cash equivalents and short-term
investments, together with cash generated from operations to be sufficient to
meet its operating and capital requirements for at least the next twelve months.
However, the Company may need additional capital to pursue acquisitions or
significant capital improvements, neither of which is currently contemplated.
The actual amount and timing of working capital and capital expenditures that
Dot Hill may incur in future periods may vary significantly and will depend upon
numerous factors, including the amount and timing of the receipt of revenues
from continued operations, the increase in manufacturing capabilities, the
timing and extent of the introduction of new products and services, and growth
in personnel and operations.

YEAR 2000 COMPLIANCE

    In late 1999, we completed our remediation and testing of our products and
hardware and software systems to assess their year 2000 readiness. As a result
of those planning and implementation efforts, we experienced no significant
malfunctions in our products or disruptions in mission critical information
technology and non-information technology systems and believe those products and
systems successfully responded to the year 2000 date changes. To date, the
Company has not hired any additional employees or made any significant purchases
to carry out its year 2000 compliance program. At this time, the Company is not
aware of any material expenses that were incurred during 1999 in connect with
remediating our products and systems. We are not aware of any material problems
resulting from year 2000 issues, either with our products and internal systems
or the products and services of third parties. We will continue to monitor our
products and mission critical computer applications and those of our suppliers
and vendors throughout the year 2000 to ensure that any latent year 2000 matters
that may arise are addressed promptly.

THE EURO CONVERSION

    On January 1, 1999, eleven of the fifteen member countries of the European
Union established fixed conversion rates between their existing sovereign
currencies and the euro. These countries have agreed to adopt the euro as their
common legal currency on that date. The euro will then trade on currency
exchanges and be available for non-cash transactions. These countries will issue
sovereign debt exclusively in euro and will re-denominate outstanding sovereign
debt. Effective on this date, these countries will no longer control their own
monetary policies by directing independent interest rates for the legacy
currencies. Instead, the authority to direct monetary policy, including money
supply and official interest rates for the euro, will be exercised by the new
European Central Bank.

    Following introduction of the euro, the legacy currencies are scheduled to
remain legal tender in these countries as denominations of the euro between
January 1, 1999 and January 1, 2002 (the "transition period"). During the
transition period, public and private parties may pay for goods and services
using either the euro or the country's legacy currency on a "no compulsion, no
prohibition" basis. However, conversion rates no longer will be computed
directly from one legacy currency to another. Instead a "triangulation" process
will be applied whereby an amount denominated in one legacy currency first will
be converted into an amount denominated in euro, and the resultant
euro-denominated amount is converted into the second legacy currency.

    Two countries that will convert to the euro, the Netherlands and France,
generated revenue of approximately $3.9 million and $454,000, respectively, or
3.6% of Dot Hill's total revenue for 1999. Based on this percentage of revenue
generated from these two countries, Dot Hill does not anticipate that this
conversion of the euro will have a significant impact on its financial
statements. The Company is continuing to evaluate the impact this conversion
will have on its financial condition and results of operations.

                                       35
<PAGE>
ITEM 7A. QUANTITATIVE AND QUALITATIVE DISCLOSURES ABOUT MARKET RISK

    The Company does not use derivative financial instruments in its investment
portfolio. The Company's exposure to market rate risk for changes in interest
rates relates primarily to the Company's investment portfolio. The Company
places its investments in instruments that meet high credit quality standards,
as specified in the Company's investment policy guidelines; the policy also
limits the amount of credit exposure to any one issue, issuer, and type of
instrument. The Company does not expect any material loss with respect to its
investment portfolio.

    The following table provides information about the Company's investment
portfolio at December 31, 1999 and 1998. For investment securities, the table
presents principal cash flows and related weighted average interest rates by
expected maturity dates. All investment securities at December 31, 1999 are
expected to mature in 2000:

<TABLE>
<CAPTION>
                                                                  DECEMBER 31,
                                                             ----------------------
                                                               1999          1998
                                                             --------      --------
<S>                                                          <C>           <C>
Cash equivalents.......................................      $39,923       $48,833
Average interest rate..................................          3.3%          3.5%
Short-term investments.................................      $ 3,500       $ 3,500
Average interest rate..................................          3.6%          4.3%
Total portfolio........................................      $43,423       $52,333
Average interest rate..................................          3.3%          3.6%
</TABLE>

    The Company considers the carrying value of its investment securities to
approximate their fair value due to the relatively short period of time between
origination of the investments and their expected realization. Accordingly,
changes in the market interest rate would not have a material effect on the fair
value of such investments.

ITEM 8. FINANCIAL STATEMENTS AND SUPPLEMENTARY DATA

    The information required by this Item is incorporated by reference from
pages F-1 through F-31 of this Annual Report on Form 10-K.

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

    Because the Company's headquarters, primary manufacturing facility and
finance department were, following the Merger, relocated to the former
headquarters of Artecon in Carlsbad, California, the Board of Directors
concluded that it would be more convenient to retain Deloitte and Touche LLP
("Deloitte and Touche"), the independent accountants of Artecon, as the
Company's independent accountants. The Company's audit committee recommended
that the Company dismiss Arthur Andersen and retain Deloitte & Touche LLP as the
Company's independent accountants.

    On December 9, 1999, the Company dismissed Arthur Andersen LLP ("Arthur
Andersen") as its independent accountants. The reports of Arthur Andersen on the
Company's financial statements as of December 31, 1997 and 1998 and for each of
the years in the three-year period ended December 31, 1998 contained no adverse
opinion or disclaimer of opinion and were not qualified or modified as to
uncertainty, audit scope or accounting principles.

    During the Company's fiscal years ended December 31, 1997 and 1998 and
through December 9, 1999, there have been no disagreements with Arthur Andersen
on a matter of accounting principles or practices, financial statement
disclosure or auditing scope or procedure, which disagreements if not resolved
to the satisfaction of Arthur Andersen would have caused them to make reference
thereto in their report.

                                       36
<PAGE>
    During the fiscal years ended December 31, 1997 and 1998 and through
December 9, 1999, there have been no reportable events (as defined in
Regulation S-K Item 304(a)(1)(v)).

    The Company engaged Deloitte & Touche LLP as its new independent accountants
effective December 10, 1999. During the fiscal years ended December 31, 1997 and
1998 and through December 9, 1999, the Company has not consulted with
Deloitte & Touche LLP on items which (1) were or should have been subject to
Statement of Auditing Standard No. 50 or (2) concerned the subject matter of a
disagreement or reportable event with the former accountants (as described in
Regulation S-K Item 304(a)(2)).

ITEM 10. DIRECTORS AND EXECUTIVE OFFICERS OF THE REGISTRANT

    Some of the information required by this item is incorporated by reference
to the Registrant's Definitive Proxy Statement to be filed with the Commission
pursuant to Regulation 14A in connection with the 2000 Annual Meeting (the
"Proxy Statement") under the headings "Proposal 1" and "Section 16(a) Beneficial
Ownership Reporting Compliance." Other information required by this item is
incorporated by reference to Item 1 of Part I of this Annual Report on
Form 10-K under the heading "Executive Officers of the Registrant at
December 31, 1999."

ITEM 11. EXECUTIVE COMPENSATION

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

ITEM 12. SECURITY OWNERSHIP OF CERTAIN BENEFICIAL OWNERS AND MANAGEMENT

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

ITEM 13. CERTAIN RELATIONSHIPS AND RELATED TRANSACTIONS

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

ITEM 14. EXHIBITS, FINANCIAL STATEMENTS SCHEDULES, AND REPORTS ON FORM 8-K

(a) The following documents are filed as part of this report:

    (1) Financial statements:

       The consolidated balance sheets for the years ended December 31, 1999 and
       1998, and the consolidated statements of operations, comprehensive
       operations, statements of shareholders' equity and cash flows for each of
       the years ended December 31, 1999, 1998 and 1997 together with notes
       thereto.

    (2) Financial statement schedules required to be filed by Item 8 of this
       Form:

    (3) Exhibits:

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
<C>                     <S>
3.1..........           Amended and Restated Certificate of Incorporation of the
                        Company.

3.2..........           Amended and Restated By-laws of the Company.(1)

4.1..........           Form of Common Stock certificate of the Company.(1)

9.1..........           Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
                        Turchin and Mr. Mays.(1)
</TABLE>

                                       37
<PAGE>

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
<C>                     <S>
10.1.........           Compensation Plan and agreement between the Company and
                        Philip Black.(1)

10.2.........           Employment Agreement between the Company and Carol
                        Turchin.(1)

10.3.........           Employment Agreement between the Company and Benjamin
                        Monderer.(1)

10.4.........           Employment Agreement between the Company and Mark Mays.(1)

10.5.........           Incentive Program of the Company, as amended.

10.6.........           License Agreement with Emulex Corporation.(1)

10.7.........           Lease Agreement, dated as of December 23, 1993, as extended
                        and modified, related to the Company's facilities in New
                        York City.(1)

10.8.........           Employee Stock Purchase Plan.

10.9.........           Lease Modification Agreement.(2)

10.10........           1999 Compensation Plan and Agreement between the Company and
                        Philip Black.(2)

10.11........           Separation letter agreement dated October 13, 1999 between
                        the Company and Elizabeth Strong.

10.12........           Employment letter agreement dated August 2, 1999 between the
                        Company and James L. Lambert.

10.13........           Employment letter agreement dated August 2, 1999 between the
                        Company and Dana W. Kammersgard.

10.14........           Employment offer letter dated November 12, 1999 between the
                        Company and Preston Romm.

10.16........           Amendment dated August 2, 1999 to compensation plan and
                        agreement between the Company and Philip Black.

10.17........           Employment letter agreement dated August 2, 1999 between the
                        Company and Benjamin Monderer.

16.1.........           Letter re: change in certifying accountants.(3)

23.1.........           Consent of Deloitte & Touche LLP.

23.2.........           Consent of Arthur Andersen LLP.

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

27.1.........           Financial Data Schedule.
</TABLE>

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

(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
    (No. 333-31873) or amendments thereto and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
    year ended December 31, 1998 and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
    December 9, 1999 and incorporated herein by reference.

(b) Reports on Form 8-K:

    (i) The Company filed a Current Report on Form 8-K dated December 9, 1999
       reporting under Item 4 ("Change in Registrant's Certifying Accountant")
       the change in the Company's independent accountants from Arthur Andersen
       LLP to Deloitte & Touche LLP.

                                       38
<PAGE>
                                   SIGNATURES

    PURSUANT TO THE REQUIREMENTS OF SECTION 13 OR 15(d) OF THE SECURITIES
EXCHANGE ACT OF 1934, THE REGISTRANT HAS DULY CAUSED THIS REPORT TO BE SIGNED ON
ITS BEHALF BY THE UNDERSIGNED, THEREUNTO DULY AUTHORIZED.

<TABLE>
<S>                                                    <C>  <C>
                                                       DOT HILL SYSTEMS CORP.
                                                       (Registrant)

                                                       By:               /s/ PHILIP BLACK
                                                            -----------------------------------------
                                                                           Philip Black
                                                                   (CO-CHIEF EXECUTIVE OFFICER)

                                                       Date: March 28, 2000

                                                       By:             /s/ JAMES L. LAMBERT
                                                            -----------------------------------------
                                                                         James L. Lambert
                                                                   (CO-CHIEF EXECUTIVE OFFICER)

                                                       Date: March 28, 2000
</TABLE>

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

    Pursuant to the requirements of the Securities Exchange Act of 1934, as
amended, 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>
                     SIGNATURES                                    TITLE                    DATE
                     ----------                                    -----                    ----
<C>                                                    <S>                             <C>
                  /s/ PHILIP BLACK                     Co-Chief Executive Officer,     March 28, 2000
     -------------------------------------------         Executive Vice President of
                    Philip Black                         International Sales and
                                                         Director (Principal
                                                         Executive Officer)

                /s/ JAMES L. LAMBERT                   Co-Chief Executive Officer,     March 28, 2000
     -------------------------------------------         President, Chief Operating
                  James L. Lambert                       Officer and Director
                                                         (Principal Executive
                                                         Officer)
</TABLE>

                                       39
<PAGE>

<TABLE>
<CAPTION>
                     SIGNATURES                                    TITLE                    DATE
                     ----------                                    -----                    ----
<C>                                                    <S>                             <C>
                  /s/ PRESTON ROMM                     Chief Financial Officer and     March 28, 2000
     -------------------------------------------         Treasurer (Principal
                    Preston Romm                         Accounting Officer)

                   /s/ W.R. SAUEY                      Chairman of the Board of        March 28, 2000
     -------------------------------------------         Directors
                     W.R. Sauey

                  /s/ CAROL TURCHIN                    Vice Chairman of the Board of   March 28, 2000
     -------------------------------------------         Directors
                    Carol Turchin

                /s/ BENJAMIN MONDERER                  Executive Vice President of     March 28, 2000
     -------------------------------------------         Applications Engineering,
                  Benjamin Monderer                      Professional Services
                                                         and Director

                /s/ BENJAMIN BRUSSELL                  Director                        March 28, 2000
     -------------------------------------------
                  Benjamin Brussell

               /s/ NORMAN R. FARQUHAR                  Director                        March 28, 2000
     -------------------------------------------
                 Norman R. Farquhar

               /s/ DR. CHONG SUP PARK                  Director                        March 28, 2000
     -------------------------------------------
                 Dr. Chong Sup Park
</TABLE>

                                       40
<PAGE>
                                 EXHIBIT INDEX

<TABLE>
<CAPTION>
       EXHIBIT
       NUMBER                                   DESCRIPTION
---------------------                           -----------
<C>                     <S>
3.1..........           Amended and Restated Certificate of Incorporation of the
                        Company.
3.2..........           Amended and Restated By-laws of the Company.(1)
4.1..........           Form of Common Stock certificate of the Company.(1)
9.1..........           Voting Agreement dated July 31, 1997 among Dr. Monderer, Ms.
                        Turchin and Mr. Mays.(1)
10.1.........           Compensation Plan and agreement between the Company and
                        Philip Black.(1)
10.2.........           Employment Agreement between the Company and Carol
                        Turchin.(1)
10.3.........           Employment Agreement between the Company and Benjamin
                        Monderer.(1)
10.4.........           Employment Agreement between the Company and Mark Mays.(1)
10.5.........           Incentive Program of the Company, as amended.
10.6.........           License Agreement with Emulex Corporation.(1)
10.7.........           Lease Agreement, dated as of December 23, 1993, as extended
                        and modified, related to the Company's facilities in New
                          York City.(1)
10.8.........           Employee Stock Purchase Plan.
10.9.........           Lease Modification Agreement.(2)
10.10........           1999 Compensation Plan and Agreement between the Company and
                        Philip Black.(2)
10.11........           Separation letter agreement dated October 13, 1999 between
                        the Company and Elizabeth Strong.
10.12........           Employment letter agreement dated August 2, 1999 between the
                        Company and James L. Lambert.
10.13........           Employment letter agreement dated August 2, 1999 between the
                        Company and Dana W. Kammersgard.
10.14........           Employment offer letter dated November 12, 1999 between the
                        Company and Preston Romm.
10.16........           Amendment dated August 2, 1999 to compensation plan and
                        agreement between the Company and Philip Black.
10.17........           Employment letter agreement dated August 2, 1999 between the
                        Company and Benjamin Monderer.
16.1.........           Letter re: change in certifying accountants.(3)
23.1.........           Consent of Deloitte & Touche LLP.
23.2.........           Consent of Arthur Andersen LLP.
24.1.........           Power of Attorney. Reference is made to page 39.
27.1.........           Financial Data Schedule.
</TABLE>

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

(1) Filed as an exhibit to the Registrant's Registration Statement on Form S-1
    (No. 333-31873) or amendments thereto and incorporated herein by reference.

(2) Filed as an exhibit to the Registrant's Annual Report on Form 10-K for the
    year ended December 31, 1998 and incorporated herein by reference.

(3) Filed as an exhibit to the Registrant's Current Report on Form 8-K dated
    December 9, 1999 and incorporated herein by reference.

                                       41
<PAGE>
                               TABLE OF CONTENTS

<TABLE>
<CAPTION>
                                                                PAGE
                                                              --------
<S>                                                           <C>
INDEPENDENT AUDITORS' REPORT................................   F-2
REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS....................   F-3
INDEPENDENT AUDITORS' REPORT................................   F-4

FINANCIAL STATEMENTS:

Consolidated balance sheets as of December 31, 1999 and
  1998......................................................   F-5

Consolidated statements of operations and comprehensive
  operations for the years ended December 31, 1999, 1998,
  and 1997..................................................   F-6

Consolidated statements of shareholders' equity for the
  years ended December 31, 1999, 1998, and 1997.............   F-7

Consolidated statements of cash flows for the years ended
  December 31, 1999, 1998, and 1997.........................   F-8

Notes to consolidated financial statements for the years
  ended December 31, 1999, 1998, and 1997...................   F-9

Independent Auditor's Report on Schedule....................   S-1

Report of Independent Public Accountants....................   S-2

Schedule II--Valuation and Qualifying Accounts..............   S-3
</TABLE>

                                      F-1
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
Dot Hill Systems Corp.

    We have audited the accompanying consolidated balance sheets of Dot Hill
Systems Corp. and subsidiaries (the Company) as of December 31, 1999, and the
related consolidated statements of operations and comprehensive operations,
shareholders' equity and cash flows for the year then ended. 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 audit.

    We conducted our audit in accordance with auditing standards generally
accepted in the United States of America. 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 audit provides a
reasonable basis for our opinion.

    In our opinion, such consolidated financial statements present fairly, in
all material respects, the consolidated financial position of Dot Hill Systems
Corp. and subsidiaries as of December 31, 1999, and the results of their
operations and their cash flows for the year then ended in conformity with
accounting principles generally accepted in the United States of America.

/s/ Deloitte & Touche LLP
Costa Mesa, California
January 25, 2000

                                      F-2
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Dot Hill Systems Corp:

    We have audited the accompanying consolidated balance sheet of Dot Hill
Systems Corp. (formerly Box Hill Systems Corp., a New York Corporation) and
subsidiaries as of December 31, 1998, and the related consolidated statements of
income, shareholders' equity and cash flows for each of the two years in the
period ended December 31, 1998. 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 did not audit the
financial statements of Artecon, Inc., a company acquired during 1999 in a
transaction accounted for as a pooling of interests, as discussed in Note 1, as
of March 31, 1999, and for each of the two years in the period ended March 31,
1999. Such statements are included in the consolidated financial statements of
Dot Hill Systems Corp. and reflect total assets and total revenue of 34% and
57%, respectively, in fiscal 1998 and total revenue of 49% in fiscal 1997, of
the related consolidated totals. These statements were audited by other auditors
whose report has been furnished to us, and our opinion, insofar as it relates to
the amounts included for Artecon, Inc., is based solely on the report of the
other auditors.

    We conducted our audits in accordance with auditing standards generally
accepted in the United States. 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 and the report of other
auditors provide a reasonable basis for our opinion.

    In our opinion, based on our audit and the report of other auditors, the
consolidated financial statements referred to above present fairly, in all
material respects, the financial position of Dot Hill Systems Corp. and
subsidiaries as of December 31, 1998, and the results of their operations and
their cash flows for each of the two years in the period ended December 31,
1998, all in conformity with accounting principles generally accepted in the
United States.

                                          /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania,
  August 2, 1999

                                      F-3
<PAGE>
                          INDEPENDENT AUDITORS' REPORT

The Board of Directors and Shareholders
of Artecon, Inc.

    We have audited the consolidated balance sheets of Artecon, Inc. and its
subsidiaries (the Company) as of March 31, 1999, and the related consolidated
statements of operations, comprehensive operations, shareholders' equity, and
cash flows for each of the two years in the period ended March 31, 1999 (none of
which are presented separately herein). 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, such consolidated financial statements present fairly, in
all material respects, the financial position of Artecon, Inc. and its
subsidiaries at March 31, 1999, and the results of their operations and their
cash flows for each of the two years in the period ended March 31, 1999, in
conformity with generally accepted accounting principles.

/s/Deloitte & Touche LLP
Costa Mesa, California
May 5, 1999

                                      F-4
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                          CONSOLIDATED BALANCE SHEETS
                        AS OF DECEMBER 31, 1999 AND 1998

           (IN THOUSANDS, EXCEPT FOR SHARE AND PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
ASSETS
CURRENT ASSETS:
Cash and cash equivalents...................................  $ 44,451   $ 56,307
Short-term investments......................................     3,500      3,500
Accounts receivable, net of allowance of $1,727 and
  $1,657....................................................    20,403     25,832
Inventories.................................................    12,279     19,764
Prepaid expenses and other..................................     2,503      3,190
Prepaid income taxes........................................        --        737
Deferred income taxes.......................................     5,879      4,223
                                                              --------   --------
    Total current assets....................................    89,015    113,553
PROPERTY AND EQUIPMENT, net.................................     2,675      2,967
OTHER ASSETS................................................        46        114
GOODWILL, net...............................................       554      1,252
OTHER INTANGIBLE ASSETS, net................................       258      1,059
DEFERRED INCOME TAXES.......................................    11,110      8,085
                                                              --------   --------
                                                              $103,658   $127,030
                                                              ========   ========
LIABILITIES AND SHAREHOLDERS' EQUITY
CURRENT LIABILITIES:
Current portion of long-term debt...........................  $     --   $    483
Accounts payable............................................    15,094     19,459
Accrued expenses............................................     6,644      6,690
Merger and restructuring accrual............................     1,474      1,254
Customer deposits...........................................     1,692      2,173
Deferred revenue............................................     3,626      3,842
Income taxes payable........................................     1,539        785
                                                              --------   --------
    Total current liabilities...............................    30,069     34,686
BORROWINGS UNDER LINE OF CREDIT.............................       272     10,552
LONG-TERM DEBT..............................................        --      1,356
DEFERRED RENT AND OTHER LONG-TERM LIABILITIES...............       448        420
MINORITY INTEREST...........................................        46         52
                                                              --------   --------
    Total liabilities.......................................    30,835     47,066
COMMITMENTS AND CONTINGENCIES (Note 15)
SHAREHOLDERS' EQUITY:
Preferred stock $.01 par value, 5,000,000 shares authorized,
  none issued...............................................        --         --
Convertible Preferred A shares; $.005 par value, none and
  2,494,159 shares issued and outstanding, liquidation
  preference of $0 and $4,988...............................        --         12
Common stock $.01 par value, 40,000,000 shares authorized;
  23,887,871 and 23,009,881 shares issued and outstanding...       239        230
Additional paid-in capital..................................    97,137     96,775
Accumulated other comprehensive operations..................      (215)       (62)
Accumulated deficit.........................................   (24,338)   (16,991)
                                                              --------   --------
    Total shareholders' equity..............................    72,823     79,964
                                                              --------   --------
                                                              $103,658   $127,030
                                                              ========   ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-5
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

       CONSOLIDATED STATEMENTS OF OPERATIONS AND COMPREHENSIVE OPERATIONS
             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
NET REVENUE.................................................  $124,216   $168,355   $136,684
COST OF GOODS SOLD..........................................    81,579    109,361     96,473
INVENTORY WRITE-DOWN........................................     5,033        403         --
                                                              --------   --------   --------
GROSS MARGIN................................................    37,604     58,591     40,211
OPERATING EXPENSES:
Sales and marketing.........................................    24,204     34,839     18,121
Engineering and product development.........................     7,401      9,946      5,523
General and administrative..................................    10,837      9,981      7,049
Shareholder officers' compensation..........................        --      1,275      7,538
Impairment of intangible assets.............................     1,224        867         --
Merger and restructuring expenses...........................     7,392      1,404         --
Acquired in-process research and development costs..........        --         --     18,200
                                                              --------   --------   --------
  Total operating expenses..................................    51,058     58,312     56,431
                                                              --------   --------   --------
OPERATING (LOSS) INCOME.....................................   (13,454)       279    (16,220)
OTHER INCOME (EXPENSE):
Interest income (expense), net..............................     1,136        906       (139)
Other income (expense), net.................................       381        395       (124)
Loss on foreign currency transactions, net..................       (94)       (14)      (141)
                                                              --------   --------   --------
  Total other income (expense)..............................     1,423      1,287       (404)
                                                              --------   --------   --------
(LOSS) INCOME BEFORE INCOME TAX (BENEFIT) PROVISION.........   (12,031)     1,566    (16,624)
INCOME TAX (BENEFIT) PROVISION..............................    (2,984)       982     (2,394)
                                                              --------   --------   --------
NET (LOSS) INCOME...........................................  $ (9,047)  $    584   $(14,230)
                                                              ========   ========   ========
Basic net (loss) income per share...........................  $  (0.39)  $   0.03   $  (1.06)
                                                              ========   ========   ========
Weighted average shares used to calculate basic net (loss)
  income per share..........................................    23,385     22,903     13,456
                                                              ========   ========   ========
Diluted net (loss) income per share.........................  $  (0.39)  $   0.02   $  (1.06)
                                                              ========   ========   ========
Weighted average shares used to calculate diluted net (loss)
  income per share..........................................    23,385     24,442     13,456
                                                              ========   ========   ========
PROFORMA DATA (UNAUDITED) (Note 1):
Net loss before income tax benefit..........................                        $(16,624)
Proforma income tax benefit.................................                            (700)
                                                                                    --------
Proforma net loss...........................................                        $(15,924)
                                                                                    ========
Proforma basic and diluted net loss per share...............                        $  (1.18)
                                                                                    ========
COMPREHENSIVE OPERATIONS:
Net (loss) income...........................................  $ (9,047)  $    584   $(14,230)
Foreign currency translation adjustments....................      (153)        35        233
                                                              --------   --------   --------
Comprehensive (loss) income.................................  $ (9,200)  $    619   $(13,997)
                                                              ========   ========   ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-6
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                CONSOLIDATED STATEMENTS OF SHAREHOLDERS' EQUITY
             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)
<TABLE>
<CAPTION>
                                                   CONVERTIBLE                                              ACCUMULATED
                                CONVERTIBLE    PREFERRED A SHARES         COMMON STOCK        ADDITIONAL       OTHER
                                 PREFERRED    ---------------------   ---------------------    PAID-IN     COMPREHENSIVE
                                   STOCK        SHARES      AMOUNT      SHARES      AMOUNT     CAPITAL       OPERATIONS
                                -----------   ----------   --------   ----------   --------   ----------   --------------
<S>                             <C>           <C>          <C>        <C>          <C>        <C>          <C>
BALANCE, January 1, 1997......    $ 5,029             --     $ --     11,977,200     $120      $   580         $(330)
Sale of common stock, net of
  offering costs..............                                         4,125,000       41       56,514
Distribution to S corporation
  shareholders................
Termination of S corporation
  status......................                                                                    (115)
Issuance of common stock......       (125)                               340,400        3          814
Conversion of preferred
  stock.......................     (4,904)     2,494,159       12         11,600        1        4,891
Assumed issuance of common
  stock in connection with
  acquisition of SDI (Note
  2)..........................                                         6,125,600       61       32,884
Exercise of stock options.....                                           113,871        1           92
Foreign currency translation
  adjustment..................                                                                                   233
Net loss......................
                                  -------     ----------     ----     ----------     ----      -------         -----

BALANCE, December 31, 1997....         --      2,494,159       12     22,693,671      227       95,660           (97)
Acquisition of Box Hill
  Europe......................                                             4,959                    52
Issuance of common stock
  warrants....................                                                                     213
Exercise of stock options,
  including tax benefit.......                                           232,070        2          506
Sale of common stock under
  employee stock purchase
  plan........................                                            79,181        1          344
Foreign currency translation
  adjustment..................                                                                                    35
Net income....................
                                  -------     ----------     ----     ----------     ----      -------         -----

BALANCE, December 31, 1998....         --      2,494,159       12     23,009,881      230       96,775           (62)
Conversion of preferred
  shares......................                (2,494,159)     (12)       719,037        7            5
Exercise of stock options,
  including tax benefit.......                                           118,634        1          235
Sale of common stock under
  employee stock purchase
  plan........................                                            40,319        1          122
Foreign currency translation
  adjustment..................                                                                                  (153)
Net loss......................
Adjustment to conform Artecon
  to the Company's year-end...
                                  -------     ----------     ----     ----------     ----      -------         -----

BALANCE, December 31, 1999....    $    --             --     $ --     23,887,871     $239      $97,137         $(215)
                                  =======     ==========     ====     ==========     ====      =======         =====

<CAPTION>
                                  RETAINED
                                  EARNINGS         TOTAL
                                (ACCUMULATED   SHAREHOLDERS'
                                  DEFICIT)        EQUITY
                                ------------   -------------
<S>                             <C>            <C>
BALANCE, January 1, 1997......    $  8,467       $ 13,866
Sale of common stock, net of
  offering costs..............                     56,555
Distribution to S corporation
  shareholders................     (11,927)       (11,927)
Termination of S corporation
  status......................         115
Issuance of common stock......                        692
Conversion of preferred
  stock.......................
Assumed issuance of common
  stock in connection with
  acquisition of SDI (Note
  2)..........................                     32,945
Exercise of stock options.....                         93
Foreign currency translation
  adjustment..................                        233
Net loss......................     (14,230)       (14,230)
                                  --------       --------
BALANCE, December 31, 1997....     (17,575)        78,227
Acquisition of Box Hill
  Europe......................                         52
Issuance of common stock
  warrants....................                        213
Exercise of stock options,
  including tax benefit.......                        508
Sale of common stock under
  employee stock purchase
  plan........................                        345
Foreign currency translation
  adjustment..................                         35
Net income....................         584            584
                                  --------       --------
BALANCE, December 31, 1998....     (16,991)        79,964
Conversion of preferred
  shares......................
Exercise of stock options,
  including tax benefit.......                        236
Sale of common stock under
  employee stock purchase
  plan........................                        123
Foreign currency translation
  adjustment..................                       (153)
Net loss......................      (9,047)        (9,047)
Adjustment to conform Artecon
  to the Company's year-end...       1,700          1,700
                                  --------       --------
BALANCE, December 31, 1999....    $(24,338)      $ 72,823
                                  ========       ========
</TABLE>

                See notes to consolidated financial statements.

                                      F-7
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                     CONSOLIDATED STATEMENTS OF CASH FLOWS
             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

                                 (IN THOUSANDS)

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
CASH FLOWS FROM OPERATING ACTIVITIES:
Net (loss) income...........................................  $ (9,047)  $    584   $(14,230)
Adjustments to reconcile net (loss) income to net cash (used
  in) provided by operating activities, excluding effect
  from acquisitions:
  Depreciation and amortization.............................     1,757      4,674      1,280
  Asset impairment charges..................................       937      1,490         --
  Acquired in-process research and development costs........        --         --     18,200
  Provision for doubtful accounts...........................        70        123        271
  Deferred income taxes.....................................    (4,687)    (3,627)    (3,688)
  Stock-based compensation expense..........................        --        213        699
  Other.....................................................        --         64         70
  Changes in operating assets and liabilities, net of
    effects from acquisitions:
    Accounts receivable.....................................     5,359      6,326     (4,370)
    Inventories.............................................     7,485        (59)     2,039
    Prepaid expenses and other..............................       748     (1,184)      (709)
    Prepaid income taxes....................................       737       (565)        --
    Accounts payable........................................    (4,365)    (2,738)     3,032
    Accrued expenses........................................       (46)    (5,243)       (27)
    Merger and restructuring accrual........................       220         --         --
    Customer deposits.......................................      (481)        30        797
    Deferred revenue........................................      (216)     1,831        995
    Income taxes payable....................................       754       (757)       757
    Long-term liabilities...................................        28        120        (91)
    Other...................................................        --         57        (15)
                                                              --------   --------   --------
      Net cash (used in) provided by operating activities...      (747)     1,339      5,010
CASH FLOWS FROM INVESTING ACTIVITIES:
Purchases of property and equipment.........................      (896)    (1,159)    (1,291)
Sales (purchases) of short-term investments.................        --      5,805     (9,305)
Cash received in acquisitions, net..........................        --         --      7,351
                                                              --------   --------   --------
      Net cash (used in) provided by investing activities...      (896)     4,646     (3,245)
CASH FLOWS FROM FINANCING ACTIVITIES:
Distributions to S corporation shareholders.................        --       (227)   (11,700)
Net proceeds from initial public offering...................        --         --     56,555
Proceeds from exercise of stock options.....................       236        198         93
Proceeds from sale of stock to employees....................       123        345         --
Proceeds from bank and other borrowings.....................    23,139     48,292     24,988
Payments on bank and other borrowings.......................   (35,258)   (47,210)   (24,802)
Issuance of common shares...................................        --         --         17
                                                              --------   --------   --------
      Net cash (used in) provided by financing activities...   (11,760)     1,398     45,151
EFFECT OF EXCHANGE RATE CHANGES ON CASH.....................      (153)        35        233
ADJUSTMENT FOR CHANGE IN ARTECON YEAR-END...................     1,700         --         --
                                                              --------   --------   --------
NET (DECREASE) INCREASE IN CASH AND CASH EQUIVALENTS........   (11,856)     7,418     47,149
CASH AND CASH EQUIVALENTS, beginning of year................    56,307     48,889      1,740
                                                              --------   --------   --------
CASH AND CASH EQUIVALENTS, end of year......................  $ 44,451   $ 56,307   $ 48,889
                                                              ========   ========   ========
SUPPLEMENTAL DISCLOSURES OF CASH FLOW INFORMATION--Cash paid
  during the year for:
  Interest..................................................  $    642   $    817   $    663
                                                              ========   ========   ========
  Income taxes..............................................  $    129   $  4,498   $  1,328
                                                              ========   ========   ========
</TABLE>

 See Note 2 for details of assets acquired and liabilities assumed in purchase
                                 transactions.

                                      F-8
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
             FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES

    BACKGROUND--Dot Hill Systems Corp. (Dot Hill or the Company) designs,
manufactures, markets and supports high performance data storage systems for the
open systems computing environment. In the United States, the Company employs a
direct marketing strategy aimed at data-intensive industries which, to date,
include financial services, telecommunications, internet service providers,
multimedia, healthcare, government/defense and academia. The Company's
international strategy is to sell directly to end users, when possible, and to
use distributors. The Company's manufacturing operations consist primarily of
assembly and integration of components and subassemblies into the Company's
products. The Company's manufacturing, principal research and development, and
principal sales and marketing operations are conducted from the Company's
California and New York City facilities.

    BASIS OF PRESENTATION--On August 2, 1999, Box Hill Systems Corp. (Box Hill)
and Artecon, Inc. (Artecon) completed a Merger (the Merger) in which the two
companies were merged in a tax-free, stock-for-stock transaction. The Merger was
accounted for using the pooling-of-interests method. Subsequent to the Merger,
the combined Company changed its name to Dot Hill Systems Corp. The accompanying
consolidated financial statements set forth a presentation of the Company's
financial statements retroactively restated to reflect the combination with
Artecon. The historical financial statements of Box Hill as of December 31,
1998, and for each of the two years in the period ended December 31, 1998, have
been combined with the financial statements of Artecon as of March 31, 1999, and
for each of the two years in the period ended March 31, 1999, respectively. As a
result of changing Artecon's fiscal year-end from March 31 to conform with the
Company's December 31 year-end, the results of operations for the three months
ended March 31, 1999, are included in the combined results of operations for
both the years ended December 31, 1999 and 1998, and are reflected as an
adjustment in the consolidated statements of shareholders' equity. Artecon's
total revenue and net income for this period was $18.3 million and
$1.7 million, respectively. Artecon's cash flows used in operating, investing,
and financing activities for this period were $2.6 million, $39, and
$1.8 million, respectively.

    During the third quarter of 1999, and in connection with the Box Hill and
Artecon Merger, the Company recorded expenses totalling $13,362 related to the
Merger and management's restructuring and integration plan associated with the
Merger (Note 5).

    Revenue and net income (loss) as previously reported for Box Hill for six
months ended June 30, 1999 and the years ended December 31, 1998, and 1997, and
for Artecon for the six months ended

                                      F-9
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
June 30, 1999 and the years ended March 31, 1999 and 1998, respectively, and as
restated using the pooling-of-interest method, are as follows:

<TABLE>
<CAPTION>
                                                     REVENUE    NET INCOME (LOSS)
                                                     --------   -----------------
<S>                                                  <C>        <C>
Six-months ended June 30, 1999 (unaudited):
  Box Hill.........................................  $ 28,265        $    924
  Artecon..........................................    37,484            (588)
                                                     --------        --------
  Restated.........................................  $ 65,749        $    336
                                                     ========        ========
1998:
  Box Hill.........................................  $ 72,476        $  5,934
  Artecon..........................................    95,879          (5,350)
                                                     --------        --------
  Restated.........................................  $168,355        $    584
                                                     ========        ========
1997:
  Box Hill.........................................  $ 70,344        $  5,058
  Artecon..........................................    66,340         (19,288)
                                                     --------        --------
  Restated.........................................  $136,684        $(14,230)
                                                     ========        ========
</TABLE>

    INITIAL PUBLIC OFFERING--Box Hill completed an initial public offering (the
Offering) of its common stock effective September 16, 1997. The offering
consisted of the sale of 5.5 million shares of common stock at an initial public
offering price of $15.00, of which 3.3 million shares were issued and sold by
Box Hill and 2.2 million shares were sold by individuals who were the only
shareholders of Box Hill prior to the Offering. Additionally, 825,000 shares of
common stock were purchased from Box Hill at $15.00 per share by the
underwriters upon the exercise of an over-allotment option. The net proceeds to
Box Hill, after deducting estimated underwriting discounts and offering
expenses, were approximately $56.6 million.

    PRINCIPLES OF CONSOLIDATION--The accompanying consolidated financial
statements include the accounts of Dot Hill Systems Corp., and its subsidiaries.
All significant intercompany transactions and balances have been eliminated in
consolidation.

    USE OF ACCOUNTING ESTIMATES--The preparation of financial statements in
conformity with accounting principles generally accepted in the United States of
America 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 those estimates.

    REVENUE RECOGNITION AND PRODUCT WARRANTY--The Company recognizes revenue on
product sales when products are shipped, net of any allowances for estimated
product returns. Revenue from maintenance contracts is deferred and recognized
on a straight-line basis over the contract term, generally twelve months. The
cost of maintenance contracts purchased from third-parties for resale is
deferred and recognized as expense over the contract term. At December 31, 1999,
the balance of deferred costs of purchase maintenance contracts was $968 and is
included in prepaid expenses and other assets.

                                      F-10
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    For product sales that include a software element, the Company applies
Statement of Position No. 97-2, SOFTWARE REVENUE RECOGNITION, whereby revenue is
recognized from software licenses at the time the product is shipped, provided
there are no significant Company obligations related to the sale and the
resulting receivable is deemed collectible and there is vendor-specific
objective evidence supporting the value of the separate contract elements.
Revenue from software maintenance agreements is recognized ratably over the term
of the related agreement. Revenue from consulting and other software-related
services is recognized as the services are rendered.

    The Company generally extends to its customers the warranties provided to
the Company by its suppliers. The Company provides for the estimated cost that
may be incurred for product warranties in the period the related revenue is
recognized. To date, the Company's suppliers have reimbursed the majority of the
Company's warranty costs. There can be no assurance that such suppliers will
continue to reimburse such costs in the future, which could have a material
adverse effect on the Company's financial position and results of operations.

    CASH AND CASH EQUIVALENTS--Cash and cash equivalents include highly liquid
investments purchased with an original maturity of three months or less. Cash
equivalents consist principally of money market mutual funds.

    SHORT-TERM INVESTMENTS--The Company accounts for investments in accordance
with Statement of Financial Accounting Standards (SFAS) No. 115, ACCOUNTING FOR
CERTAIN INVESTMENTS IN DEBT AND EQUITY SECURITIES. Short-term investments have
been categorized as available for sale and, as a result, are stated at fair
value. Short-term investments are generally comprised of variable rate
securities that provide for early redemption within twelve months.

    INVENTORIES--Inventories are comprised of purchased parts and assemblies,
which include direct labor and overhead, and are valued at the lower of cost
(first-in, first-out) or market.

    PROPERTY AND EQUIPMENT--Property and equipment are recorded at cost.
Depreciation and amortization are computed using the straight-line method over
the estimated useful lives of the assets (two to seven years). Leasehold
improvements are amortized on a straight-line basis over the life of the lease.
Significant improvements are capitalized and expenditures for maintenance and
repairs are charged to expense as incurred.

    GOODWILL AND OTHER INTANGIBLE ASSETS--Goodwill related to acquisitions is
being amortized on a straight-line basis over a period of seven years.
Accumulated amortization was $422 and $679 at December 31, 1999 and 1998,
respectively. Other intangible assets related to acquisitions are being
amortized on a straight-line basis over two to four years. Goodwill and other
intangible assets are periodically reviewed for events or changes, which may
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of goodwill and other intangible assets
utilizing expected future undiscounted cash flows to determine whether or not
impairment to such values has occurred. During the years ended December 31, 1999
and 1998, the Company recorded impairments associated with certain other
intangible assets of $1,224 and $867, respectively (Note 5).

    LONG-LIVED ASSETS--The Company accounts for the impairment and disposition
of long-lived assets in accordance with SFAS No. 121, ACCOUNTING FOR THE
IMPAIRMENT OF LONG-LIVED ASSETS AND FOR

                                      F-11
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
LONG-LIVED ASSETS TO BE DISPOSED OF. In accordance with SFAS No. 121, long-lived
assets to be held are reviewed whenever events or changes in circumstances
indicate that their carrying value may not be recoverable. The Company
periodically reviews the carrying value of long-lived assets utilizing expected
future undiscounted cash flows to determine whether or not an impairment to such
value has occurred. Based on its most recent analysis, the Company believes that
no impairment exists at December 31, 1999. During the years ended December 31,
1999 and 1998, the Company recognized an impairment of certain long-lived assets
in connection with the merger and restructuring activities (Note 5).

    ADVERTISING COSTS--The Company expenses advertising costs as incurred. For
the years ended December 31, 1999, 1998 and 1997, advertising expense was $768,
$1,340, and $996, respectively.

    PRODUCT DEVELOPMENT--Research and development costs are expensed as
incurred. In conjunction with the development of its products, the Company
incurs certain software development costs. No costs have been capitalized
pursuant to SFAS No. 86, ACCOUNTING FOR THE COSTS OF COMPUTER SOFTWARE TO BE
SOLD, LEASED, OR OTHERWISE MARKETED, since the period between achieving
technological feasibility and completion of such software is relatively short
and software development costs qualifying for capitalization have been
insignificant.

    INCOME TAXES--The Company accounts for its income taxes under the provisions
of SFAS No. 109, ACCOUNTING FOR INCOME TAXES. Deferred taxes on income result
from temporary differences between the reporting of income for financial
statements and tax reporting purposes. Measurement of the deferred items is
based on enacted tax laws. In the event the future consequences of differences
between financial reporting bases and tax bases of the Company's assets and
liabilities result in a deferred tax asset, SFAS No. 109 requires an evaluation
of the probability of being able to realize the future benefits indicated by
such asset. A valuation allowance related to a deferred tax asset is recorded
when it is more likely than not that some portion or all of the deferred tax
asset will not be realized.

    Box Hill was subject to taxation under Subchapter "S" of the Internal
Revenue Code and the New York State Tax Code until the termination of its S
corporation status concurrent with its initial public offering in
September 1997. Accordingly, prior to the offering, no provision was made for
federal or state income taxes on Box Hill's taxable income, and the Box Hill
shareholders were taxed directly on their proportionate share of the Company's
taxable income. In connection with the offering, Box Hill terminated its S
corporation status and was subject to federal and state income taxes for the C
corporation's pro rata share of Box Hill's 1997 taxable income. Upon terminating
its S corporation status, the Company recorded a $855 tax benefit for the
recognition of a net deferred tax asset (Note 10).

    STOCK-BASED COMPENSATION--The Company accounts for stock-based awards to
employees, using the intrinsic value method in accordance with Accounting
Principles Board (APB) No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES.

    NET INCOME PER SHARE--The Company computes net income per share in
accordance with SFAS No. 128, EARNINGS PER SHARE. Basic earnings per share is
computed by dividing net income available to common shareholders by the weighted
average number of common shares outstanding for the period. Diluted earnings per
share reflects the potential dilution of securities by including other common
stock

                                      F-12
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
equivalents, including stock options, in the weighted average number of common
shares outstanding for a period, if dilutive.

    The table below sets forth the reconciliation of the denominator of the
earnings per share calculation for the years ended December 31:

<TABLE>
<CAPTION>
                                                        1999       1998       1997
                                                      --------   --------   --------
<S>                                                   <C>        <C>        <C>
Shares used in computing basic net income per
  share.............................................   23,385     22,903     13,456
Conversion of preferred stock.......................       --        719         --
Dilutive effect of stock options....................       --        820         --
                                                       ------     ------     ------
Shares used in computing diluted net income per
  share.............................................   23,385     24,442     13,456
                                                       ======     ======     ======
</TABLE>

    For the year ended December 31, 1999, options to purchase 2,219,037 shares
of common stock with exercise prices ranging from $0.50 to $17.50 were
outstanding, but were not included in the computation of dilutive net loss per
share because a net loss was incurred for the year. Additionally, preferred
stock convertible into 419,438 shares of common stock (based on the weighted
average of such shares under SFAS No. 128) has also been excluded in the
computation of dilutive net loss per share because a net loss was incurred for
the year.

    For the year ended December 31, 1998, options to purchase 1,105,007 shares
of common stock with exercise prices ranging from $9.50 to $18.13 per share were
outstanding, but were not included in the computation of diluted net income per
share for the entire year because the exercise price of the options was greater
than the average market price of the common shares. These options expire at
various times through November 2008. For the year ended December 31, 1997,
options to purchase 1,980,527 shares of common stock with exercise prices
ranging from $.20 to $18.13 were outstanding, but were not included in the
computation of dilutive net loss per share because a net loss was incurred for
the year.

    FOREIGN CURRENCY TRANSLATION--The accounts of foreign subsidiaries have been
translated from their respective functional currencies at appropriate exchange
rates in accordance with SFAS No. 52, FOREIGN CURRENCY TRANSLATION. Cumulative
translation adjustments are included as a separate component of shareholders'
equity. Gains and losses on short-term intercompany foreign currency
transactions are recognized through income as incurred.

    FAIR VALUE OF FINANCIAL INSTRUMENTS--Pursuant to SFAS No. 107, DISCLOSURE
ABOUT FAIR VALUE OF FINANCIAL INSTRUMENTS, the Company is required to estimate
the fair value of all financial instruments included on its balance sheet at
December 31, 1999 and 1998. The Company considers the carrying value of such
amounts in the financial statements to approximate their fair value due to the
relatively short period of time between origination of the instruments and their
expected realization.

    COMPREHENSIVE INCOME--Pursuant to SFAS No. 130, REPORTING COMPREHENSIVE
INCOME, the Company has included consolidated statements of comprehensive
operations in the accompanying consolidated financial statements. See Note 4 for
further discussion.

                                      F-13
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

1. BACKGROUND AND SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES (CONTINUED)
    RECENT ACCOUNTING PRONOUNCEMENT--In 1998, the Company adopted SFAS No. 131,
DISCLOSURE ABOUT SEGMENTS OF AN ENTERPRISE AND RELATED INFORMATION. This
statement establishes standards for the way companies report information about
operating segments in annual financial statements. It also establishes standards
for related disclosure about products and services, geographic areas and major
customers (Note 16).

    In June 1998, the FASB issued SFAS No. 133, ACCOUNTING FOR DERIVATIVE
INSTRUMENTS AND HEDGING ACTIVITIES, which the Company is required to adopt
effective in its fiscal year 2001. This statement establishes accounting and
reporting standards for derivative instruments, including certain derivative
instruments embedded in other contracts and for hedging activities. The Company
does not invest in derivative investments and does not presently engage nor does
it intend to engage in future hedging activities, but will continue to evaluate
the effects of adopting SFAS No. 133.

    RECLASSIFICATIONS--Certain prior year balances have been reclassified to
conform with the current year presentation.

    PROFORMA DATA (UNAUDITED)--Concurrent with the initial public offering of
Box Hill in 1997, the Company terminated its status as an S corporation and is
subject to federal and state income taxes. Accordingly, for informational
purposes, the accompanying consolidated statement of operations for the year
ended December 31, 1997 includes a pro forma adjustment for the income taxes
which would have been recorded if the Company had been a C corporation for the
entire period, based on the tax laws in effect during the period. The proforma
adjustment for income taxes does not include the one-time income tax benefit of
$855 recorded in recognition of the deferred tax assets (Note 10).

2. ACQUISITIONS

    STORAGE DIMENSIONS, INC.--During fiscal 1997, Artecon completed a reverse
merger into Storage Dimensions, Inc. (SDI). Immediately following the merger,
SDI changed its name to Artecon. In the merger, shareholders of the former
Artecon received approximately 62% of the total issued and outstanding common
stock, and 100% of the total issued and outstanding preferred stock of the
merged company. Therefore, the merger was treated as a purchase of SDI by
Artecon for accounting purposes. SDI's operating results have been included in
the Company's financial statements from the date of acquisition. The purchase
price for accounting purposes was determined based on the fair market value of
the outstanding SDI stock on December 18, 1997, using the average bid and ask
price of $3.96875. The purchase price was allocated $17,281 to assets acquired
(consisting primarily of cash and cash equivalents, accounts receivable,
inventories, property and equipment, deferred tax assets, and other assets),
$7,438 to goodwill and other intangible assets, $14,057 to liabilities assumed
and $14,500 to in-process research and development expenses, which had no future
alternative use. During the year ended December 31, 1998, Artecon recorded
adjustments associated with certain tax-related matters that existed at the time
of the merger with SDI. The amount of the purchase price allocated to goodwill
was decreased by approximately $581 as a result of these adjustments.

    FALCON SYSTEMS, INC.--On August 21, 1997, Artecon acquired certain net
assets of Falcon Systems, Inc. (Falcon), a manufacturer and distributor of
computer peripheral equipment. The purchase price of $3,500 included $1,000 in
cash and $2,500 of promissory notes (Note 9). The acquisition was

                                      F-14
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

2. ACQUISITIONS (CONTINUED)
accounted for as a purchase and Falcon's results of operations for the period
from August 21, 1997, are included in the accompanying consolidated financial
statements. The purchase price was allocated $10,232 to assets acquired
(consisting primarily of inventories, accounts receivable, property and
equipment, and other current assets), $638 to goodwill and other intangible
assets, $14,138 to debt and liabilities assumed, and $3,700 to in-process
research and development expenses, which had no future alternative use. In
connection with the acquisition, a partnership was created to purchase certain
assets from Falcon. The partners are majority shareholders of the company. The
partnership is considered to be a Special Purpose Entity and, accordingly, the
accompanying consolidated financial statements include the accounts of the
partnership and all intercompany transactions have been eliminated. Effective
December 31, 1999, the partnership was terminated. The termination of the
partnership did not have a material effect on the Company's results of
operations.

    The following table displays the assets and liabilities that were acquired
as a result of these acquisitions:

<TABLE>
<CAPTION>
                                                              SDI       FALCON
                                                            --------   --------
<S>                                                         <C>        <C>
Fair value of other assets acquired.......................  $17,281    $10,232
Acquired in-process research and development costs........   14,500      3,700
Other intangible assets...................................    2,400        420
Goodwill..................................................    4,538        127
Acquired developed technology.............................      500         91
Note to Falcon shareholder................................       --     (2,500)
Fair market value of SDI stock............................  (32,945)        --
Cash paid for acquisition, net of cash acquired...........    7,783       (432)
                                                            -------    -------
Liabilities assumed.......................................  $14,057    $11,638
                                                            =======    =======
</TABLE>

    Unaudited pro forma supplemental results of operations of the Company for
the year ended December 31, 1997, are included below. Such pro forma
presentation has been prepared assuming that the acquisitions had occurred as of
January 1, 1997:

<TABLE>
<CAPTION>

<S>                                                           <C>
Net revenue.................................................  $214,939
Net loss....................................................    (5,884)
Pro forma basic and diluted net loss per share..............     (0.30)
Weighted average shares used to calculate pro forma
basic and diluted net loss per share........................    19,387
</TABLE>

    The pro forma results include pro forma adjustments, including amortization
of goodwill and other intangible assets, and interest expense related to the
promissory notes issued to Falcon's previous shareholder. In-process research
and development expense has been excluded from the pro forma results of
operations for the year ended December 31, 1997.

                                      F-15
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

3. RISKS AND UNCERTAINTIES

    The Company's future results of operations involve a number of risks and
uncertainties. Factors that could affect the Company's future operating results
and cause actual results to vary materially from expectations include, but are
not limited to, dependence on new products, dependence on a limited number of
suppliers of high quality components, reliance on a limited number of principal
customers, concentration of customers in targeted industries, difficulties in
managing growth, difficulties in attracting and retaining qualified personnel,
competition, competitive pricing, dependence on key personnel, enforcement of
the Company's intellectual property rights, dependence on a limited number of
production facilities, and an uneven pattern of quarterly results.

    CONCENTRATION OF CREDIT RISK--Financial instruments that potentially subject
the Company to concentrations of credit risk consist primarily of trade accounts
receivable. The Company does not require collateral or other securities to
support customer receivables. A significant portion of the Company's net revenue
is derived from sales to customers in the financial services and
telecommunications industries. For the years ended December 31, 1999, 1998 and
1997, direct sales to customers in the financial services and telecommunications
industries as a percentage of total net revenues were 18% and 21%, 27% and 20%,
and 21% and 24%, respectively. For the year ended December 31, 1999, one
customer accounted for 10% of total net revenues. For the years ended
December 31, 1998, and 1997, no single customer accounted for greater than 10%
of the Company's net revenue.

    EXPORT SALES--The following table summarizes export sales by geographical
region as a percentage of net revenue at December 31:

<TABLE>
<CAPTION>
                                                              1999       1998       1997
                                                            --------   --------   --------
<S>                                                         <C>        <C>        <C>
Asia......................................................     3.8%       3.3%       5.6%
Europe....................................................     9.8        6.1        8.4
Other.....................................................     2.2        0.7        0.6
                                                              ----       ----       ----
                                                              15.8%      10.1%      14.6%
                                                              ====       ====       ====
</TABLE>

    DEPENDENCE ON SUPPLIERS--The Company purchases substantially all of its disk
drives, a critical component of its storage products, from one supplier.
Approximately 23%, 22%, and 32% of the Company's total component purchases were
made from this supplier for the years ended December 31, 1999, 1998 and 1997,
respectively. The Company resells the products of various third parties
including one supplier of tape libraries and other products. During 1999, 1998
and 1997, approximately 17%, 15%, and 6%, respectively, of total purchases were
from this supplier.

    There are a limited number of suppliers for certain of the Company's other
components and management believes that other suppliers could provide certain
similar products on comparable terms. Any shortage of key components, and any
delay or other difficulty in obtaining such components from other suppliers and
integrating them into the Company's products, or lack of supply from sole source
suppliers could have a material adverse effect on the Company's financial
position and results of operations.

                                      F-16
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

4. OTHER COMPREHENSIVE OPERATIONS

    Accumulated other comprehensive operations for each of the three years in
the period ended December 31, 1999, is comprised of the following:

<TABLE>
<CAPTION>
                                                              FOREIGN CURRENCY
                                                           TRANSLATION ADJUSTMENTS
                                                           -----------------------
<S>                                                        <C>
Balance, January 1, 1997.................................           $(330)
Foreign currency translation adjustment..................             233
                                                                    -----

Balance, December 31, 1997...............................             (97)
Foreign currency translation adjustment..................              35
                                                                    -----

Balance, December 31, 1998...............................             (62)
Foreign currency translation adjustment..................            (153)
                                                                    -----

Balance, December 31, 1999...............................           $(215)
                                                                    =====
</TABLE>

5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS

    During the third quarter of 1999, and in connection with the Box Hill and
Artecon merger, the Company recorded expenses totaling $13,362 related to the
Merger and management's restructuring and integration plan associated with the
Merger, as follows:

<TABLE>
<CAPTION>

<S>                                                           <C>
Inventory write-downs.......................................  $ 5,033
Professional fees...........................................    4,029
License termination.........................................    1,000
Employee termination costs..................................    1,100
Write-down of intangibles...................................      937
Facility closures and related costs.........................      647
Other integration costs.....................................      616
                                                              -------
    Total...................................................  $13,362
                                                              =======
</TABLE>

    Management's restructuring and integration plan relates primarily to the
consolidation and discontinuance of product lines, which resulted in inventory
and intangible assets write-downs of $5,033 and $937, respectively. As a result
of the product line consolidation, the Company also terminated a license
agreement with a third-party vendor, resulting in license termination costs of
$1,000. Additionally, management's plan includes consolidating the Company's
manufacturing operations and other functions into the Company's headquarters in
Carlsbad, California, which resulted in employee termination charges of $1,100,
consisting primarily of severance payments for 38 employees, facility closure
costs of $647 and other integration costs of $616. The Company completed the
plan during the

                                      F-17
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
   (CONTINUED)
fourth quarter of 1999. The major components of the charges and the remaining
accrual balance as of December 31, 1999, are as follows:

<TABLE>
<CAPTION>
                                                                          ACCRUED
                                                                       RESTRUCTURING
                                                 EXPENSES     PAID         COSTS
                                                 --------   --------   -------------
<S>                                              <C>        <C>        <C>
Professional services..........................   $4,029    $(4,029)      $   --
License termination............................    1,000     (1,000)          --
Employee termination costs.....................    1,100       (620)         480
Facility closures and related costs............      647       (125)         522
Other integration costs........................      616       (526)          90
                                                  ------    -------       ------
Total..........................................   $7,392    $(6,300)      $1,092
                                                  ======    =======       ======
</TABLE>

    In December 1998, Artecon's Board of Directors approved a plan for Artecon
to consolidate one of its engineering facilities from Milpitas, California, to
Carlsbad, California, to consolidate certain domestic sales and service
locations and to eliminate certain product lines and development activities. The
Company recorded pre-tax restructuring charges of $1,807 to cover the costs
associated with these actions. Such charges consisted primarily of employee
termination costs, inventory write-downs, facility closures and related
expenses, an intangible asset impairment and tooling machinery write-offs.

    Employee termination costs consist primarily of severance payments for 43
employees, all of which were terminated as of December 31, 1998. The majority of
the employees terminated were employed at the engineering facility in Milpitas,
California and at the various domestic sales and service locations. Inventory
write-downs and the tooling write-off primarily relate to the discontinuance of
certain low-volume and low-profit product lines. Of the total restructuring
charge associated with the inventory write-downs, $403 has been included as a
separate component of cost of sales in the accompanying financial statements.
Facility closures and related expenses consist of lease termination costs and
the write-off of certain property and equipment which was disposed of in
connection with the closures. The major components of the charges and the
reconciliation of the expenses and accrual activity during 1998 and 1999 was as
follows:

<TABLE>
<CAPTION>
                                                                      ACCRUED                     ACCRUED
                                                        AMOUNTS    RESTRUCTURING    AMOUNTS    RESTRUCTURING
                                          INITIAL      UTILIZED      COSTS AT      UTILIZED      COSTS AT
                                       RESTRUCTURING   IN FISCAL   DECEMBER 31,    IN FISCAL   DECEMBER 31,
                                          CHARGE       YEAR 1998       1998        YEAR 1999       1999
                                       -------------   ---------   -------------   ---------   -------------
                                                                  (IN THOUSANDS)
<S>                                    <C>             <C>         <C>             <C>         <C>
Employee termination costs...........     $  254        $  (200)       $ 54          $ (54)        $ --
Inventory write-downs................        403           (115)        300           (300)          --
Facility closures and related
  expenses...........................        715           (476)        239           (239)          --
Tooling write-off....................        135           (123)         --             --           --
Intangible asset impairment..........        300           (300)         --             --           --
                                          ------        -------        ----          -----         ----
    Total............................     $1,807        $(1,214)       $593          $(593)        $ --
                                          ======        =======        ====          =====         ====
</TABLE>

                                      F-18
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

5. ACCRUED MERGER AND RESTRUCTURING COSTS AND IMPAIRMENT OF LONG-LIVED ASSETS
   (CONTINUED)
    In connection with Artecon's acquisitions of Falcon and SDI, Artecon
allocated $420 and $1,600, respectively, to an assembled workforce intangible
asset. The Company recorded an impairment of these intangible assets of $300
during the year ended December 31, 1998, which has been included as a component
of the restructuring charge, as the impairment was a direct result of employee
terminations associated with activities that were exited. Furthermore, as a
result of significant attrition and terminations of employees, which had been
utilized as the basis for the assembled workforce valuation, the Company
recognized a write-down of the intangible assets associated with the workforce
of $867.

    In connection with the merger with SDI, Artecon recorded a reserve for
acquisition related costs of $6.6 million, of which $661,000 was outstanding at
December 31, 1998. All of the acquisition related costs were included in the
purchase price allocation performed during 1997. The major components of the
reserve and the reconciliation of the accrual activity during 1998 and 1999 was
as follows:

<TABLE>
<CAPTION>
                            INITIAL MERGER                   ACCRUED MERGER                   ACCRUED MERGER
                                 COSTS          AMOUNTS           COSTS          AMOUNTS           COSTS
                          (DECEMBER 31, 1997)   UTILIZED   (DECEMBER 31, 1998)   UTILIZED   (DECEMBER 31, 1999)
                          -------------------   --------   -------------------   --------   -------------------
                                                             (IN THOUSANDS)
<S>                       <C>                   <C>        <C>                   <C>        <C>
Employee termination
  costs (80
  employees)............         $2,923         $(2,761)           $162           $(162)            $ --
Professional service
  fees..................          2,225          (1,909)            316              --              316
Other costs.............          1,433          (1,250)            183            (117)              66
                                 ------         -------            ----           -----             ----
    Total...............         $6,581         $(5,920)           $661           $(279)            $382
                                 ======         =======            ====           =====             ====
</TABLE>

    The Company anticipates that the remaining merger costs liability at
December 31, 1999, which consists primarily of miscellaneous professional
services obligations and lease and contract termination costs, will be paid in
2000 and believes that there are no unresolved issues or additional liabilities
that may result in an adjustment to the purchase price allocation for the SDI
merger.

6. INVENTORIES

    Inventories consist of the following at December 31:

<TABLE>
<CAPTION>
                                                              1999       1998
                                                            --------   --------
<S>                                                         <C>        <C>
Purchased parts and materials.............................  $ 9,093    $16,476
Work-in-process...........................................      438        163
Finished goods............................................    2,748      3,125
                                                            -------    -------
                                                            $12,279    $19,764
                                                            =======    =======
</TABLE>

                                      F-19
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

7. PROPERTY AND EQUIPMENT

    Property and equipment consist of the following at December 31:

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Machinery and equipment.....................................   $7,237     $5,798
Furniture, fixtures, and computer equipment.................      636      1,212
Leasehold improvements......................................      930        949
                                                               ------     ------
                                                                8,803      7,959
Less accumulated depreciation...............................   (6,128)    (4,992)
                                                               ------     ------
                                                               $2,675     $2,967
                                                               ======     ======
</TABLE>

    Depreciation expense was $1,752, $2,760, and $1,138 for the years ended
December 31, 1999, 1998 and 1997, respectively.

8. CREDIT FACILITIES

    BOX HILL FACILITY--In October 1997, Box Hill entered into an agreement with
a commercial bank which provides for a $10 million revolving line of credit. Box
Hill did not have any borrowings under this facility in 1999 or 1998. Borrowings
under the facility will be collateralized by a pledge of substantially all of
the Company's assets and borrowings greater than $5 million will also be
required to be secured by short-term investments. Additionally, the Company is
required to comply with certain financial covenants, as defined. The revolver
expired in May 1999.

    ARTECON FACILITIES--Artecon had a $15 million revolving credit facility with
a domestic commercial bank (the Agreement). The Agreement provided for financing
collateralized by all assets of Artecon, as defined by the Agreement, and
matures on May 14, 2001, unless otherwise renewed. The line of credit bore
interest at the bank's prime rate. Monthly payments consisted of interest only,
with the principal due at maturity. Subsequent to the Merger with Artecon on
August 2, 1999, the Company repaid all outstanding debt under this facility.

    Artecon's Japanese subsidiary has two lines of credit with a Japanese bank
for borrowings up to an aggregate 35 million Yen (US$343 at December 31, 1999)
at rates ranging from 1.8% to 2.5%. At December 31, 1999, 28 million Yen
(approximately US$272) were outstanding. Interest is due monthly with the
principal due on various dates through August 2005. Borrowings are
collateralized by inventories of the Japanese subsidiary.

                                      F-20
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

9. LONG-TERM DEBT

    Long-term debt consists of the following at December 31:

<TABLE>
<CAPTION>
                                                                1999        1998
                                                              ---------   --------
<S>                                                           <C>         <C>
Promissory notes payable to former shareholder of Falcon
  (Note 2), bearing interest at 10% per annum, monthly
  installments of principal and interest of $53 through
  August 2002 (paid in full in August 1999).................  $     --     $1,839
Less current portion........................................        --       (483)
                                                              ---------    ------
                                                              $     --     $1,356
                                                              =========    ======
</TABLE>

    Interest expense related to long-term debt was $114, $207, and $160 for the
years ended December 31, 1999, 1998, and 1997, respectively.

10. INCOME TAXES

    The components of the income tax provision are as follows for the years
ended December 31:

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Current:
Federal.....................................................  $ 1,366    $ 3,081    $   884
State, local, and foreign...................................      337      1,528        410
                                                              -------    -------    -------
                                                                1,703      4,609      1,294
                                                              -------    -------    -------
Deferred:
Federal.....................................................   (3,566)    (3,054)    (2,150)
State, local, and foreign...................................   (1,121)      (573)      (683)
Recognition of deferred tax asset upon termination of S
  corporation status........................................       --         --       (855)
                                                              -------    -------    -------
                                                               (4,687)    (3,627)    (3,688)
                                                              -------    -------    -------
                                                              $(2,984)   $   982    $(2,394)
                                                              =======    =======    =======
</TABLE>

    The provision for income taxes for the years ended December 31, 1999 and
1998 consists of federal, state and local income taxes. The provision for income
taxes for the year ended December 31, 1997, consists of federal, state and local
income taxes on Artecon's taxable income and the Box Hill C corporation's pro
rata portion of Box Hill's 1997 taxable income, state franchise taxes and a
one-time tax benefit of $855 related to the recognition of the net deferred tax
asset recorded by Box Hill upon terminating its S corporation status.

                                      F-21
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

10. INCOME TAXES (CONTINUED)
    The reconciliation of the federal statutory income tax rate and the
effective income tax rate is as follows for the years ended December 31:

<TABLE>
<CAPTION>
                                                         1999        1998        1997
                                                       --------    --------    --------
<S>                                                    <C>         <C>         <C>
Federal statutory rate.............................     (35.0)%      34.0%      (34.0)%
State and local income taxes, net of federal
  benefit..........................................      (4.6)       54.6        (0.8)
Impact of Box Hill's S corporation status..........        --          --        (4.3)
In-process research and development................        --          --        29.7
Recognition of deferred tax asset..................        --          --        (5.1)
Amortization of goodwill and intangible assets.....       2.5        14.0          --
Tax exempt interest income.........................      (4.0)      (21.9)       (0.1)
Merger costs.......................................      11.7          --          --
Tax credits and other..............................       4.6       (18.0)        0.2
                                                        -----       -----       -----
                                                        (24.8)%      62.7%      (14.4)%
                                                        =====       =====       =====
</TABLE>

                                      F-22
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

10. INCOME TAXES (CONTINUED)
    The tax effect of temporary differences that give rise to deferred income
taxes are as follows at December 31:

<TABLE>
<CAPTION>
                                                                1999       1998
                                                              --------   --------
<S>                                                           <C>        <C>
Deferred tax assets:
Warranty accrual............................................  $   373    $   372
Inventory reserve and uniform capitalization................    4,301      1,890
Vacation accrual............................................      301        113
Allowance for bad debts.....................................      733        233
Depreciation and amortization...............................       --         77
Deferred rent...............................................      135        123
Other accruals and reserves.................................      510      1,564
In-process research and development.........................      723      1,418
Net operating losses and tax credits........................    9,959      7,538
Restructuring reserve.......................................       --        231
Acquisition costs...........................................    1,461         64
Acquired intangibles........................................       93         --
                                                              -------    -------
                                                               18,589     13,623
Deferred tax liabilities:
State taxes.................................................    1,257        784
Depreciation and amortization...............................       48         --
Import reserve..............................................      295        277
Acquired intangibles........................................       --        254
                                                              -------    -------
                                                                1,600      1,315
                                                              -------    -------
Net deferred tax assets.....................................  $16,989    $12,308
                                                              =======    =======
Current.....................................................  $ 5,879    $ 4,223
Long-term...................................................   11,110      8,085
                                                              -------    -------
Total.......................................................  $16,989    $12,308
                                                              =======    =======
</TABLE>

    As of December 31, 1999, the Company has federal and state net operating
losses of $20,358 and $10,239, which begin to expire in the tax years ending
2009 and 2011, respectively. In addition, the Company has federal and state tax
credit carryforwards of $1,239 and $774, respectively.

    Pursuant to the Tax Reform Act of 1986, annual use of Artecon's federal net
operating loss and credit carryforwards is limited as a result of a cumulative
change in ownership of more than 50% as a result of the Merger. The annual
limitation is approximately $3,045 per year. Management believes that it is more
likely than not that future taxable income will be sufficient to realize the net
deferred tax asset.

                                      F-23
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

11. CONVERTIBLE PREFERRED A SHARES

    The convertible Preferred A shares have voting rights, provide for dividends
when and if declared by the Board of Directors and have liquidation preference
over common shares. The convertible preferred shares are convertible into common
shares, at the option of the holder, any time after January 1, 1999, at the
conversion rate, as defined in the amended Articles of Incorporation. In
connection with the merger between Box Hill and Artecon, the convertible
Preferred A shares were converted into 719,037 shares of the Company's common
stock, representing the liquidation value of the Preferred A shares.

12. STOCK INCENTIVE PLAN

    The Company's stock incentive plan (the Plan), adopted in May 1995 and
amended in July 1997, provides for the granting of incentive and nonqualified
stock options to employees, non-employee directors, and consultants. The Company
has currently reserved 4,392,500 shares of common stock for issuance pursuant to
the Plan. The terms and conditions of grants of stock options are determined by
the Board of Directors in accordance with the terms of the Plan.

    Information with respect to options under the Plan, as restated for the
combination with the Artecon plan, is as follows:

<TABLE>
<CAPTION>
                                                                       WEIGHTED
                                                            NUMBER     AVERAGE
                                                              OF       EXERCISE
                                                            SHARES      PRICE
                                                           ---------   --------
<S>                                                        <C>         <C>
BALANCE, January 1, 1997.................................  1,508,780    $ 3.19
    Grants...............................................    774,650     13.46
    Forfeitures..........................................   (130,632)    11.85
    Exercises............................................   (172,271)     1.24
                                                           ---------    ------

BALANCE, December 31, 1997...............................  1,980,527      6.90
    Grants...............................................  1,155,500      8.21
    Forfeitures..........................................   (963,047)    10.95
    Exercises............................................   (232,470)     0.85
                                                           ---------    ------

BALANCE, December 31, 1998...............................  1,940,510      6.41
    Grants...............................................  1,136,875      5.48
    Forfeitures..........................................   (739,714)    10.80
    Exercises............................................   (118,634)     0.70
                                                           ---------    ------

BALANCE, December 31, 1999...............................  2,219,037    $ 4.80
                                                           =========    ======
</TABLE>

    The options generally vest ratably over four or five year period and are
exercisable over a period of ten years.

                                      F-24
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

12. STOCK INCENTIVE PLAN (CONTINUED)
    Information with respect to options issued under the Plan at December 31,
1999, is as follows:

<TABLE>
<CAPTION>
                                                    OPTIONS OUTSTANDING               OPTIONS EXERCISABLE
                                         -----------------------------------------   ----------------------
                                                           WEIGHTED       WEIGHTED                 WEIGHTED
                                                           AVERAGE        AVERAGE                  AVERAGE
                                                          REMAINING       EXERCISE                 EXERCISE
RANGE OF EXERCISE PRICE                  OUTSTANDING   CONTRACTUAL LIFE    PRICE     OUTSTANDING    PRICE
-----------------------                  -----------   ----------------   --------   -----------   --------
<S>                                      <C>           <C>                <C>        <C>           <C>
$0.50--$0.64...........................     422,928          5.39          $0.64       370,721      $ 0.64
$0.75--$3.75...........................     214,485          6.06           0.87       139,149        0.85
$4.06--$5.38...........................     185,426          9.34           5.00        23,284        4.59
$5.50..................................     997,400          9.81           5.50         2,000        5.50
$5.94--$8.44...........................     234,950          8.37           8.03        52,975        8.04
$9.38--$17.50..........................     163,848          7.93          11.53       150,648       11.71
                                          ---------          ----          -----       -------      ------
                                         2,219,037..         8.27          $4.80       738,777      $ 3.60
                                          =========          ====          =====       =======      ======
</TABLE>

    As of December 31, 1998 and 1997, approximately 732,000 and 938,000 options
were exercisable at a weighted average exercise price of $4.68 and $6.92,
respectively.

    The Company applies APB No. 25, ACCOUNTING FOR STOCK ISSUED TO EMPLOYEES,
and the related interpretations in accounting for its employee stock options.

    Had compensation cost for the Plan been determined based upon the fair value
of the options at the date of grant, as prescribed by SFAS No. 123, ACCOUNTING
FOR STOCK-BASED COMPENSATION, the Company's net income and basic and diluted net
income per share would have been reduced to the following amounts for the years
ended December 31:

<TABLE>
<CAPTION>
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Net (loss) income:
    As reported.............................................  $ (9,047)  $   584    $(14,230)
    As adjusted.............................................   (10,180)   (1,424)    (14,969)

Basic net (loss) income per share:
    As reported.............................................  $  (0.39)  $  0.03    $  (1.06)
    As adjusted.............................................     (0.44)    (0.06)      (1.11)

Diluted net (loss) income per share:
    As reported.............................................  $  (0.39)  $  0.02    $  (1.06)
    As adjusted.............................................  $  (0.44)    (0.06)      (1.11)
</TABLE>

    The weighted average fair value of each stock option granted during the
years ended December 31, 1999, 1998, and 1997, was $3.86, $9.29, and $8.87,
respectively.

                                      F-25
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

12. STOCK INCENTIVE PLAN (CONTINUED)
    The fair value of each option grant is estimated on the date of grant using
the Black-Scholes option pricing model with the following weighted average
assumptions for the years ended December 31:

<TABLE>
<CAPTION>
                                                 1999        1998        1997
                                              ----------   ---------   ---------
<S>                                           <C>          <C>         <C>
Risk free interest..........................  5.0%-6.0%      5.5%        6.4%
Expected dividend yield.....................      --          --          --
Expected life...............................  5-7 years    5-7 years   5-7 years
Expected volatility.........................    65.0%        60.0%       60.0%
</TABLE>

    STOCK OPTIONS ISSUED TO CONSULTANT--In October 1998, the Company issued an
option to a sales consultant to purchase 150,000 shares of common stock at an
exercise price of $5.00, which was equal to the fair value of the Company's
stock on the date of grant. The option was exercisable immediately. This option
was exercised in January 2000. The Company recorded a charge of $213 for the
year ended December 31, 1998, for the fair value of option on the date of grant,
which was calculated using the Black-Scholes option pricing model.

13. RELATED-PARTY TRANSACTIONS

    DISTRIBUTIONS TO S CORPORATION SHAREHOLDERS--In September 1997, the Company
made distributions of $10,500 to its S corporation shareholders, representing
the estimated taxed, but undistributed S corporation earnings of the Company as
of June 30, 1997. In December 1997, the Company made distributions of $1,200 to
its S corporation shareholders, representing the estimated taxed, but
undistributed, S corporation earnings of the Company as of December 31, 1997. In
March 1998, the Company made distributions of $227, representing the final
distribution for taxed, but undistributed, S corporation earnings.

    BOX HILL EUROPE--Box Hill Systems Europe Limited (Box Hill Europe) was
formed in 1995 by the Company's founding shareholders to provide marketing and
technical support services to the Company in Europe. Effective January 1, 1998,
the Company issued 4,959 shares of common stock to Box Hill's founding
shareholders, collectively, in exchange for 100% of the shares of Box Hill
Europe (the BHE Merger). The transaction has been accounted for as a merger
between entities under common control in a manner similar to a pooling of
interests.

    After the BHE Merger, Box Hill Europe became a wholly owned subsidiary of
Box Hill. On January 1, 1998, the fair value of the 4,959 shares of Box Hill
common stock issued to the founding shareholders was $52, which was equal to the
net book value of Box Hill Europe on that date. No restatement of the Company's
financial statements is required as a result of this transaction because the
results of Box Hill Europe, consisting only of sales and marketing expenses,
which have been included in the Company's statements of operations for all
periods prior to the BHE Merger.

                                      F-26
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

13. RELATED-PARTY TRANSACTIONS (CONTINUED)

    SALES TO AND PURCHASES FROM RELATED PARTIES--Revenues from sales to
affiliated companies for the years ended December 31, 1999, 1998, and 1997, were
approximately $18, $48, and $125, respectively. Artecon purchased certain goods
from affiliates and was subject to a management fee of approximately $4 per
month from an affiliate, which was terminated upon completion of Artecon's
merger with SDI. Purchases from affiliated companies for the years ended
December 31, 1999, 1998 and 1997, were approximately $89, $80, and $130,
respectively.

14. EMPLOYEE BENEFIT PLANS

    BOX HILL RETIREMENT SAVINGS PLAN--Effective August 1, 1995, the Company
established a retirement savings plan under the provisions of Section 401(k) of
the Internal Revenue Code. The plan covers all employees who were employed on
the effective date of the plan or upon the attainment of age 21. The Company can
make discretionary contributions to the plan. No contributions were made to the
plan for the years ended December 31, 1999, 1998 and 1997.

    ARTECON SAVINGS PLAN--Artecon has a savings plan which qualifies under
Section 401(k) of the Internal Revenue Code. Under the plan, participating U.S.
employees may defer up to 15% of their pretax salary, but not more than
statutory limits. Artecon matches 50% of eligible employees' contributions up to
a specified limit ($500). The Company's matching contributions to the savings
plan were $49, $67, and $38 for the years ended December 31, 1999, 1998, and
1997, respectively.

    EMPLOYEE STOCK PURCHASE PLAN--In August 1997, the Company adopted an
employee stock purchase plan under the provisions of Section 423 of the Internal
Revenue Code. The plan provides eligible employees of the Company with an
opportunity to purchase shares of the Company's common stock at 85% of fair
market value, as defined. The Company has reserved 750,000 shares of common
stock for issuance pursuant to this plan. For the years ended December 31, 1999
and 1998, 40,319 and 79,181 shares were issued under the plan.

15. COMMITMENTS AND CONTINGENCIES

    OPERATING LEASES--The Company leases office space and equipment under
noncancellable operating leases which expire at various dates through
September 2007. Rent expense for the years ended December 31, 1999, 1998, and
1997, was $2,199, $2,636, and $1,499, respectively.

                                      F-27
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

15. COMMITMENTS AND CONTINGENCIES (CONTINUED)
    Future minimum lease payments, on a cash basis, under all noncancelable
operating leases at December 31, 1999, are as follows:

<TABLE>
<S>                                                           <C>
2000........................................................   $1,741
2001........................................................      901
2002........................................................      739
2003........................................................      710
2004........................................................      698
Thereafter..................................................    2,098
                                                               ------
                                                               $6,887
                                                               ======
</TABLE>

    EMPLOYMENT AGREEMENTS--In connection with the Box Hill/Artecon Merger,
effective August 2, 1999, the Company entered into employment contracts with six
of its executive officers. These contracts provide for base salaries totaling
$1,780 per year. In addition, each executive will be eligible to receive, at the
discretion of the Board of Directors, a cash bonus of up to 50% of such
executives then annual base salary. If an executive's employment is terminated
under certain circumstances, such executive will be entitled to receive a lump
sum cash severance payment of up to 125% of such executive's then annual base
salary.

    CLASS ACTION LAWSUITS--In December 1998, four shareholder class action
lawsuits were filed against Box Hill, certain of its officers and directors, and
the underwriters of Box Hill's 1997 initial public offering (the Offering). The
actions were filed on behalf of purchasers of the common stock of the Company
during the period from September 16, 1997 to April 14, 1998, and allege that the
Company made misrepresentations of material fact and omitted material facts
required to be disclosed in the Company's registration statement and prospectus
issued in connection with the Offering and in statements allegedly made by the
Company and certain of its officers and directors subsequent to the Offering.
The Company believes that it has meritorious defenses to plaintiffs' claims and
intends to vigorously defend against those claims. Legal costs to defend the
claims are expected to be material and will be charged to expense as incurred.

    OTHER LITIGATION--The Company is involved in certain other legal actions and
claims arising in the ordinary course of business. Management believes that the
outcome of such other litigation and claims will not have a material adverse
effect on the Company's financial position or results of operations.

16. GEOGRAPHICAL AND SEGMENT INFORMATION

    Operating segments are defined as components of an enterprise about which
separate financial information is available that is evaluated regularly by the
Company's chief operating decision-maker, or decision making group, in deciding
how to allocate resources and in assessing performance. The Company's chief
operating decision-makers are its Chief Co-Executive Officers. The operating
segments of the Company are managed separately because each segment represents a
strategic business unit that offers different products or services.

                                      F-28
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

16. GEOGRAPHICAL AND SEGMENT INFORMATION (CONTINUED)
    Historically, Artecon reported operating segments in certain market
divisions. Subsequent to the merger, the Company operates in a single reporting
segment following the integration of Box Hill and Artecon. In the six months
since the merger, the Company's operating segments are organized on the basis of
products and services. The Company has identified operating segments to consist
of Disk, Tape, Services and other products and services. The accounting policies
of the Company's operating segments are the same as those described in Note 1,
SUMMARY OF SIGNIFICANT ACCOUNTING POLICIES. The Company currently evaluates
performance based on stand-alone segment revenue. The Company is in the process
of identifying performance based on stand-alone segment gross margin. Because
the Company does not currently evaluate performance based on segment gross
margin, operating income or return on assets at the operating segment level,
such information is not presented.

    Products and services revenue for the six months ended December 31, 1999 is
as follows:

<TABLE>
<CAPTION>
                                                DISK       TAPE     SERVICES    OTHER     CONSOLIDATED
                                              --------   --------   --------   --------   ------------
<S>                                           <C>        <C>        <C>        <C>        <C>
Six-months ended December 31, 1999
    Net revenues............................  $ 37,930   $ 7,445    $ 4,875    $ 8,217      $ 58,467
                                              ========   =======    =======    =======      ========
</TABLE>

    Reliable information prior to June 1, 1999 is not available and,
accordingly, has not been provided.

Information concerning principal geographic areas in which the Company operates
was as follows:

<TABLE>
<CAPTION>
                                                               AS OF AND FOR THE YEAR ENDED
                                                                       DECEMBER 31,
                                                              ------------------------------
                                                                1999       1998       1997
                                                              --------   --------   --------
<S>                                                           <C>        <C>        <C>
Revenue:
    United States...........................................  $108,922   $155,460   $122,227
    Europe..................................................    11,965     10,435     10,945
    Japan...................................................     3,329      2,460      3,512
                                                              --------   --------   --------
                                                              $124,216   $168,355   $136,684
                                                              ========   ========   ========

Income (loss) before taxes:
    United States...........................................  $(14,686)  $   (421)  $(19,620)
    Europe..................................................     2,665      2,122      3,239
    Japan...................................................       (10)      (135)      (243)
                                                              --------   --------   --------
                                                              $(12,031)  $  1,566   $(16,624)
                                                              ========   ========   ========

Assets:
    United States...........................................  $102,206   $126,161   $129,418
    Europe..................................................       494        416        231
    Japan...................................................     1,259        902      2,126
    Eliminations............................................      (301)      (449)      (613)
                                                              --------   --------   --------
                                                              $103,658   $127,030   $131,162
                                                              ========   ========   ========
</TABLE>

                                      F-29
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED)

    The unaudited quarterly financial information has been restated for all
prior periods to reflect the acquisition of Artecon, which was accounted for as
a pooling-of-interests. The information presented below reflects all adjustments
which, in the opinion of management, are of a normal and recurring nature
necessary to present fairly the results of operations for the periods presented.

<TABLE>
<CAPTION>
                                        FIRST          SECOND         THIRD          FOURTH         FISCAL
                                       QUARTER        QUARTER        QUARTER        QUARTER          YEAR
                                       --------       --------       --------       --------       --------
<S>                                    <C>            <C>            <C>            <C>            <C>
Year Ended December 31, 1999

Box Hill (as previously reported):
Revenues.............................  $14,285        $13,980        $    --        $    --        $     --
Income before income taxes...........      917            586             --             --              --
Net income...........................      564            360             --             --              --
Basic earnings per share.............     0.04           0.03             --             --              --
Diluted earnings per share...........     0.04           0.02             --             --              --

Artecon:
Revenues.............................   18,327         19,157             --             --              --
Income (loss) before income taxes....   (1,747)(b)        736             --             --              --
Net income (loss)....................   (1,154)           566             --             --              --
Basic earnings (loss) per share......    (0.05)          0.03             --             --              --
Diluted earnings (loss) per share....    (0.05)          0.03             --             --              --

Combined:
Revenues.............................   32,612         33,137         28,333         30,134         124,216
Income (loss) before income taxes....     (830)         1,322        (13,327)(a)        804         (12,031)
Net income (loss)....................     (590)           926        (10,833)         1,450          (9,047)
Basic earnings (loss) per share......    (0.03)          0.04          (0.46)          0.06           (0.39)
Diluted earnings (loss) per share....    (0.03)          0.04          (0.46)          0.06           (0.39)

Year Ended December 31, 1998

Box Hill (as previously reported):
Revenues.............................  $16,045        $19,802        $21,718        $14,911        $ 72,476
Income before income taxes...........    2,105          3,523          3,571            541           9,740
Net income...........................    1,295          2,106          2,200            333           5,934
Basic earnings per share.............     0.09           0.15           0.15           0.02            0.42
Diluted earnings per share...........     0.09           0.14           0.15           0.02            0.39

Artecon:
Revenues.............................   26,945         30,968         19,639         18,327          95,879
Income (loss) before income taxes....      125            527         (7,079)(b)     (1,747)(b)      (8,174)
Net income (loss)....................       69            282         (4,548)        (1,153)         (5,350)
Basic earnings (loss) per share......       --           0.01          (0.21)         (0.05)          (0.25)
Diluted earnings (loss) per share....       --           0.01          (0.21)         (0.05)          (0.25)
</TABLE>

                                      F-30
<PAGE>
                    DOT HILL SYSTEMS CORP. AND SUBSIDIARIES

                   NOTES TO CONSOLIDATED FINANCIAL STATEMENTS
       FOR THE YEARS ENDED DECEMBER 31, 1999, 1998, AND 1997 (CONTINUED)

                  (IN THOUSANDS, EXCEPT PER SHARE INFORMATION)

17. QUARTERLY FINANCIAL INFORMATION (UNAUDITED) (CONTINUED)

<TABLE>
<CAPTION>
                                        FIRST          SECOND         THIRD          FOURTH         FISCAL
                                       QUARTER        QUARTER        QUARTER        QUARTER          YEAR
                                       --------       --------       --------       --------       --------
<S>                                    <C>            <C>            <C>            <C>            <C>
Combined:
Revenues.............................   42,990         50,770         41,357         33,238         168,355
Income (loss) before income taxes....    2,230          4,050         (3,508)        (1,206)          1,566
Net income (loss)....................    1,364          2,388         (2,348)          (820)            584
Basic earnings (loss) per share......     0.06           0.10          (0.10)         (0.04)           0.03
Diluted earnings (loss) per share....     0.06           0.10          (0.10)         (0.04)           0.02
</TABLE>

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

(a) Includes pre-tax charges of $13,362 related to the Merger and management's
    restructuring and integration plan associated with the Merger.

(b) Include pre-tax charges of $2,387 in the third quarter of 1998 and $287 in
    the fourth quarter of 1998 for restructuring and impairment of certain
    intangible assets.

                                      F-31
<PAGE>
                    INDEPENDENT AUDITORS' REPORT ON SCHEDULE

To the Stockholders and the Board of Directors
Dot Hill Systems Corp.
Carlsbad, California

We have audited the financial statements of Dot Hill Systems Corp. and its
subsidiaries (the Company) as of December 31, 1999, and for the year then ended,
and have issued our report thereon dated January 25, 2000; such report is
included elsewhere in this Form 10-K. Our audit also included the consolidated
financial statement schedule for the year ended December 31, 1999, of the
Company listed in Item 14. The consolidated financial statement schedule is the
responsibility of the Company's management. Our responsibility is to express an
opinion based on our audit. In our opinion, such financial statement schedule
for the year ended December 31, 1999, when considered in relation to the basic
1999 financial statements taken as a whole, presents fairly, in all material
respects, the information set forth therein.

/s/ DELOITTE & TOUCHE LLP
January 25, 2000
Costa Mesa, California

                                      S-1
<PAGE>
                    REPORT OF INDEPENDENT PUBLIC ACCOUNTANTS

To Dot Hill Systems Corp.:

We have audited the consolidated financial statements of Dot Hill Systems Corp.
and its subsidiaries (the "Company") as of December 31, 1998 and for each of the
two years in the period ended December 31, 1998. Our audit was made for the
purpose of forming an opinion on the basic financial statements taken as a
whole. The schedule of valuation and qualifying accounts is presented for
purposes of additional analysis and is not a required part of the basic
financial statements. This information has been subjected to the auditing
procedures applied in our audit of the basic financial statements and, in our
opinion, based on our audit and the report of other auditors, is fairly stated
in all material respects in relation to the basic financial statements taken as
a whole.

                                          /s/ ARTHUR ANDERSEN LLP

Philadelphia, Pennsylvania

  August 2, 1999

                                      S-2
<PAGE>
                                  SCHEDULE II
                             DOT HILL SYSTEMS CORP.
                       VALUATION AND QUALIFYING ACCOUNTS

<TABLE>
<CAPTION>
                                        BALANCE AT    CHARGED TO   CHARGED TO
                                       BEGINNING OF   COSTS AND       OTHER                    BALANCE AT
                                          PERIOD       EXPENSES    ACCOUNTS(1)   DEDUCTIONS   END OF PERIOD
                                       ------------   ----------   -----------   ----------   -------------
<S>                                    <C>            <C>          <C>           <C>          <C>
Allowance for doubtful accounts and
  sales returns
Year ended December 31, 1999.........      1,657           752           --          682(2)       1,727
Year ended December 31, 1998.........      1,160         1,672           --        1,175(2)       1,657
Year ended December 31, 1997.........        376           320        1,215          751(2)       1,160

Reserve for excess and obsolete
  inventories
Year ended December 31, 1999.........      4,314         6,811           --        1,577(3)       9,548
Year ended December 31, 1998.........      5,691         3,627           --        5,004(3)       4,314
Year ended December 31, 1997.........      1,075         4,000        1,338          722(3)       5,691
</TABLE>

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

(1) Reserves of companies acquired.

(2) Uncollectible receivables charged off and credit issued for product returns.

(3) Consists primarily of the write-off of excess/obsolete inventories

                                      S-3