UNITED STATES
SECURITIES AND EXCHANGE COMMISSIONWashington, D.C. 20549

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FORM 10-K

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(Mark One)

|ý | ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
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For the fiscal year ended March 31, 2005

OR

|o | TRANSITION REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.
|- | -----------------------------------------------------------------------------------------

For the transition period
from                             to           
                  .

Commission File Number 000-15071

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ADAPTEC, INC.(Exact name of Registrant as specified in its charter)

Delaware(State of incorporation)

94-2748530(I.R.S. Employer Identification No.)


691 S. Milpitas Blvd.
Milpitas, California 95035(Address of principal executive offices)

Registrant's
telephone number, including area code:(408) 945-8600

Securities registered pursuant to Section 12(b) of the Act:None

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

Common Stock, $.001 Par Value

Common Share Purchase Rights(Title of Class)

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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 ý    No o

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 the 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. o

Indicate by check mark whether the registrant is an accelerated filer (as defined in Exchange Act Rule 12b-2).
Yes ý    No o

The aggregate market value of the voting stock held by non-affiliates of the Registrant was $882,234,374 based on the closing sale price of the
Registrant's common stock on The Nasdaq National Market on the last business day of the Registrant's most recently completed second fiscal quarter. Shares of the Registrant's common stock beneficially
owned by each executive officer and director of the Registrant and by each person known by the Registrant to beneficially own 10% or more of its outstanding common stock have been excluded in that
such persons may be deemed to be affiliates. This determination of affiliate status is not necessarily a conclusive determination for other purposes.

At
June 3, 2005, the Registrant had 112,481,235 shares of Common Stock outstanding, $.001 par value per share.

DOCUMENTS INCORPORATED BY REFERENCE

Parts of the following document are incorporated by reference into Part III of this Annual Report on Form 10-K: Proxy Statement for
Registrant's 2005 Annual Meeting of Stockholders.



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Table of Contents

|         |  |                                                                                                              |  | Page
|-------- |  | ------------------------------------------------------------------------------------------------------------ |  | ----
|Part I  
|Item 1.  |  | Business                                                                                                     |  | 3   
|Item 2.  |  | Properties                                                                                                   |  | 26  
|Item 3.  |  | Legal Proceedings                                                                                            |  | 27  
|Item 4.  |  | Submission of Matters to a Vote of Security Holders                                                          |  | 27  
|Item 4A. |  | Executive Officers of the Registrant                                                                         |  | 27  
|Part II 
|Item 5.  |  | Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities |  | 29  
|Item 6.  |  | Selected Financial Data                                                                                      |  | 30  
|Item 7.  |  | Management's Discussion and Analysis of Financial Condition and Results of Operations                        |  | 31  
|Item 7A. |  | Quantitative and Qualitative Disclosures About Market Risk                                                   |  | 53  
|Item 8.  |  | Financial Statements and Supplementary Data                                                                  |  | 54  
|Item 9.  |  | Changes in and Disagreements with Accountants on Accounting and Financial Disclosure                         |  | 54  
|Item 9A. |  | Controls and Procedures                                                                                      |  | 54  
|Item 9B. |  | Other Information                                                                                            |  | 55  
|Part III
|Item 10. |  | Directors and Executive Officers of the Registrant                                                           |  | 56  
|Item 11. |  | Executive Compensation                                                                                       |  | 56  
|Item 12. |  | Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters               |  | 56  
|Item 13. |  | Certain Relationships and Related Transactions                                                               |  | 56  
|Item 14. |  | Principal Accountant Fees and Services                                                                       |  | 56  
|Part IV 
|Item 15. |  | Exhibits and Financial Statement Schedules                                                                   |  | 57  
|         |  | Signatures                                                                                                   |  | 64  

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FORWARD LOOKING STATEMENTS

This Annual Report on Form 10-K contains forward-looking statements that involve risks and uncertainties. The statements contained in this
document that are not purely historical are forward-looking statements within the meaning of Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of
1934, including without limitation statements regarding our expectations, beliefs, intentions or strategies regarding our business. This Annual Report on Form 10-K includes
forward-looking statements about our business including, but not limited to, the level of our expenditures and savings for various expense items and our liquidity in future periods. We may identify
these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "will,"
"would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any
such forward-looking statements, except as may otherwise be required by law.

Our
actual results could differ materially from those anticipated in these forward-looking statements as a result of certain factors, including those set forth in the "Risk Factors"
section and elsewhere in this document. In evaluating our business, current and prospective investors should consider carefully these factors in addition to the other information set forth in this
document.

PART I

Item 1.Business

References made in this Annual Report on Form 10-K to "Adaptec," the "Company," the "Registrant," "we," "our" or "us"
refer to Adaptec, Inc. and its wholly-owned subsidiaries.

For
your convenience, we have included, in Note 20 to the Notes to Consolidated Financial Statements, a Glossary that contains (1) a brief description of a few key acronyms
commonly used in our industry that are used in this Annual Report and (2) a list of accounting rules and regulations that are also referred to herein. These acronyms and accounting rules and
regulations are listed in alphabetical order.

Overview

We design, manufacture and market storage products and software that are easy to manage and enable organizations to move, manage and protect critical data and
digital content. Our software and hardware products range from ASIC and RAID components to external storage arrays, and span SCSI, SAS, SATA, Fibre Channel, and iSCSI technologies. Our broad range of
chips, add-in cards and network storage arrays gives businesses a migration path from internal to external storage. Our products use a common management tool designed to simplify storage
administration and reduce related costs. Our products are sold through OEMs and distribution channel customers to enterprises, small and midsize businesses, government agencies, VARs, direct
marketers, and retail users across geographically diverse markets.

In
fiscal 2005, we focused on strengthening our market position through innovation and acquisition. We compete in the markets we serve on the basis of key technologies,
ease-of-use, cost effectiveness and brand as follows:



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In
fiscal 2005, we refined our internal organizational structure to operate in three reportable segments: OEM, Channel and DSG. Where historically our former SSG and SNG segment each
offered distinct products across our entire customer base, the new OEM and Channel segments offer an integrated set of products to customers that are specific to the segment. We believe that
reorganizing our business in a customer-focused manner enables us to efficiently concentrate on addressing the specific business needs of our customers and better coordinate product planning. Our
business segments are:



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We
were incorporated in 1981 in California and completed our initial public offering on the Nasdaq National Market in 1986. In March 1998, we reincorporated in Delaware. We are an
S&P SmallCap 600 Index member. Our principal executive offices are located at 691 South Milpitas Boulevard, Milpitas, California 95035 and our telephone number at that location is
(408) 945-8600. We also maintain our website at www.adaptec.com. The contents of this website are not incorporated in or otherwise to be regarded as part of this annual report.

Available Information

We make available free of charge through our website the following filings as soon as reasonably practicable after they are electronically filed with or furnished
to the Securities and Exchange Commission: our Annual Report on Form 10-K, Quarterly Reports on Form 10-Q, Current Reports on Form 8-K and all
amendments to those reports filed or furnished pursuant to Section 13(a) or 15(d) of the Securities Exchange Act of 1934.

Business Segment and Products Overview

In fiscal 2005, our OEM segment accounted for $296.3 million of our net revenues, our Channel segment accounted for $140.3 million of our net
revenues and our DSG segment accounted for $38.3 million of our net revenues (See Note 17 of the Notes to Consolidated Financial Statements for further discussion of our operating
segments' results).

Following
are discussions of our key product offerings for our OEM and Channel businesses, as well as our DSG business. As our OEM and Channel segments are based upon our customers, the
segments have similar key product offerings.

OEM and Channel

Software

Our products incorporate software that simplifies data management and protection for businesses of all sizes. We distribute the software through various methods.
Some of our software is licensed independent of the hardware to run on a range of products, including ours.

A
discussion of the software we license is as follows:

Snap EDR.Snap EDR is a high-performance product that scales to meet the business-critical data management,
protection and movement requirements of large distributed enterprises. It provides an affordable solution for enterprise-class data mobility and management of remote data, allowing users to easily
move files between Snap Servers and Windows, Linux, and UNIX servers. With integrated encryption for secure file transfer, companies can transmit sensitive data across inexpensive Internet connections
via a public WAN. Snap EDR is a flexible product whose functionality can be expanded with the purchase of additional software modules. Snap EDR is a Channel segment product only.

Host RAID.Host RAID technology allows our customers to leverage the I/O components already incorporated on their servers to
connect them with RAID-provided low cost protection.
To date, such functionality has been considered important for mission critical data only. Host RAID enables customers not only to protect their data drives but also to include protection for the boot
drives.

The
following software products are available in combination with hardware or can be purchased as an upgrade.

RAID.Our RAID technology reduces a customer's dependence on the reliability of a single disk drive by duplicating data
across multiple drives. We apply our RAID technology to disk drive interfaces, including SCSI, ATA and SATA, in order to make our RAID software, firmware and hardware available

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across
low- to high-end servers. The new RAID 6 standard can sustain two simultaneous drive failures in an array without downtime or data loss. In fiscal 2005, Adaptec became
one of the first vendors to ship a SAS RAID 6 solution. IBM has standardized on Adaptec RAID 6 software as well as our Zero Channel SAS RAID controller for IBM's new x366 xSeries servers. We are
incorporating Adaptec RAID 6 software into other Adaptec products to provide next-generation data protection.

Server-to-Server Synchronization.For small businesses, Server-to-Server
Synchronization software provides data replication between two Snap Servers, either between two SnapOS servers (Snap Server 1100 or 2200), between GuardianOS Snap Server 4500 and 4200, and/or Windows
servers. This offers customers data protection in a small backup window and, in case of disaster, access to the data without costly downtime. Server-to-Server Synchronization
is a Channel segment product only.

Storage-Virtualization.Our storage-virtualization software enables organizations to simplify management of multiple
homogenous external storage systems.

Adaptec Storage Manager.Adaptec Storage Manager is a single RAID storage management system that enables customers and IT
managers to easily manage storage across DAS and SAN environments. It allows the user to configure, expand, manage and monitor local and remote RAID storage from a single client workstation.

GuardianOS.GuardianOS provides data management for distributed enterprises. It offers scalability, centralized storage
management and a comprehensive suite of data protection tools for consolidating data, simplifying management and reducing storage total cost of ownership.

Components.

Host I/O.Driven by market needs for capacity and data protection, the host I/O interfaces support various connectivity
requirements between the central processor to internal and external peripherals, including external storage devices. Adaptec host I/O products, which incorporate our proprietary ASIC technologies,
provide customers with high-speed PCI, PCI-X and SCSI or SATA technology. These technologies can be applied to all digital applications. We have provided
next-generation SAS products to OEMs for testing and development.

In
June 2004, we completed an acquisition and licensing agreement with IBM for RAID intellectual property and the delivery of Adaptec RAID controllers for IBM's eServer iSeries
and pSeries servers or IBM i/p Series. In December 2004, we expanded this relationship with IBM to deliver Adaptec-branded RAID controllers and connectivity products, which were previously
branded as IBM, for IBM's i/p Series directly through IBM's sales channel. Host I/O is an OEM segment product only.

iSCSI/TCP/IP Offload Engine.iSCSI is specifically designed to enable cost-effective SANs to be deployed to a
broad market, using existing Ethernet infrastructure and protocols, and provide lower total cost of ownership by retaining the existing networking, interoperability, manageability, and compatibility
advantages of Ethernet. iSCSI also leverages the knowledge base among IT professionals and can be as easy to manage as DAS, while at the same time being significantly more scalable. With this
technology, our customers will be able to use inexpensive, readily available Ethernet switches, hubs and cables to implement iSCSI-based SANs. iSCSI HBAs are a Channel segment product only. Our
networking focus has been on the development of products that will provide iSCSI and TOE functionality, TOE NICs and FC/IP ASICs. We have invested over five years of research and development efforts
in iSCSI products. As a result of the strategic alliance that we entered into with ServerEngines in March 2005, we believe we have accelerated our ability to deliver next-generation
iSCSI products that can provide higher performance (10Gb/s).

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Systems.

External Storage.External storage enables highly efficient storage management without affecting server performance and
allows for improved economics by consolidating shared storage across multiple servers. Our Snap Appliance products enable us to deliver end-to-end block- and
file-based networked storage and software products to our channel customers. In September 2004, we had our first large design win with IBM to provide their external storage solution
(DS300 and DS400) focused on the small to medium businesses market.

Our
external storage products are both serial direct attached and SAN based JBODs that provide direct attached and networked data storage for small to medium business and
mission-critical applications, including data warehousing, transaction processing, email archiving, streaming video, and medical imaging. Our external storage products are highly flexible RAID
products that are simple to install, scale, manage and maintain.

Desktop Storage Group (DSG)

Our DSG segment develops, manufactures and markets high-performance I/O connectivity, digital media products and flexible desktop storage for users
and professionals in the desktop PC and notebook aftermarket. Our connectivity products enable connections between computers, peripherals and user electronic devices. Our digital media products,
including video and Media Center products, enable users to capture, create, manage and share television, digital audio and video on their computers, CDs and DVDs. In fiscal 2005, we introduced our USB
2.0 Hard Drive Enclosure Kit, which provides an easy, fast and efficient storage solution for personal computer users.

I/O Connectivity.Our current I/O products include connectivity products based on USB 2.0, FireWire/1394, SCSI and SATA
technologies. USB 2.0 and FireWire/1394 technologies handle high-bandwidth data transfers at high speeds; they are fast, configurable and easy-to-use interface
products that connect PCs to digital video camcorders, digital cameras, external storage devices and other peripherals. The emergence of digital video and multimedia applications has created the need
to move large amounts of data between peripherals and PCs. USB 2.0 and FireWire/1394 technologies offer a versatile, high-speed, low-cost method of interconnecting a variety of
PC peripherals and user electronic devices. Our USB 2.0 connectivity products maintain backward-compatibility with current USB 1.1 devices. Our FireWire/1394 connectivity products can handle
high-bandwidth data transfer rates and can connect a large number of external devices. In addition, our USB 2.0 and FireWire/1394 combo cards allow users to add USB 2.0 and FireWire/1394
connections to their computers with a single card. Our FireWire/1394 products also include software that allows users to capture, edit and share video content.

DSG
products also include the family of SCSI HBAs for desktops and laptops that bring high-speed connectivity to the desktop, enabling users to quickly move and manage high
volumes of data to and from internal and external storage devices. We recently announced the availability of controllers based on SATA technology that provide a cost-effective,
easy-to-install connection to hard drives to enhance access to
data- and bandwidth-intensive applications, such as video, audio, games and other multimedia. Our USB 2.0 hub products connect to an existing USB port to provide up to seven USB 2.0
connections, enabling users to easily connect multiple devices to a single computer.

Video.Our analog video products enable users to capture and digitize audio and video from analog sources such as camcorders
and VHS tapes, then edit and transfer those images to CDs and DVDs. VideOh! DVD enables users to convert home movies into a digital format and personalize content with special effects, sounds, titles
and interactive DVD menus. The VideOh! hardware video encoder compresses video into a fully DVD compliant MPEG-2 or MPEG-1 video stream and may be connected to the computer's
USB 2.0 or 1.1 port. VideOh! PCI provides the same functionality as our VideOh! DVD product for installation in a computer card slot. VideOh! CD provides an easy way to transfer analog home movies to
Video-CD using a CD-RW drive with a USB 1.1 port.

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Desktop Storage.Our USB 2.0 Hard Drive Enclosure Kit for both PC and MAC users provides a portable solution for adding a new
hard drive or extending the life of an old one, allowing the conversion of an internal hard disk drive to an external high-speed mobile drive. The easy-to-use
enclosure kit supports a high-capacity IDE/ATA hard disk drive of up to one terabyte and supports data transfer rates up to 480 megabits per second.

Sales, Marketing and Customers

We supply a broad range of storage products and maintain a sales, distribution, service, and support infrastructure to help customers implement these products.

We
sell our products through our sales force to OEMs worldwide, who market our products under their brands. We work closely with our OEM customers to design and integrate current
and next generation products to meet the specific requirements of end users. The OEM sales force focuses on developing relationships with OEM customers. The sales process involved in gaining major
design wins can be complex, lengthy, and expensive. Sales to these OEM customers accounted for approximately 62% of our total gross revenues in fiscal 2005.

We
also sell through our sales force to distribution customers worldwide, who market our products under the Adaptec brand; they, in turn, sell to VARs, systems integrators and retail
customers. We also sell directly to direct marketers, VARs and retail customers who market our products under the
Adaptec brand. We provide training and support for our distribution customers and to VARs and systems integrators. We also sell board-based products and provide technical support to end users
worldwide through major computer-product retailers. Sales to distribution customers accounted for approximately 38% of our total gross revenues in fiscal 2005.

We
emphasize customer support as a key element of our marketing strategy and maintain technical applications groups at our corporate headquarters and in the field. Such support includes
assisting current and prospective customers in the use of our products, writing application notes and conducting seminars for system designers. The systems-level expertise and software experience of
our engineering staff are also available to customers with particularly difficult design problems. A high level of customer support is also maintained through technical support hotlines, email and
dial-in-fax capabilities.

Our
top revenue-based OEM customers in fiscal 2005, in alphabetical order, were Dell, Fujitsu-Siemens, Hewlett-Packard, IBM, and Intel. Our top revenue-based distributors in fiscal 2005,
in alphabetical order, were CPI Computer Partner Handels GmbH, Ideal Hardware, Ingram Micro, Synnex, and Tech Data. We also sell direct to a number of manufacturing facilities, including Hon Hai
Precision, Inventec, Kingston, Sanmina-SCI, and Solectron, which generally act as third-party manufacturers for our OEM customers. Our top revenue-based retail customers in the DSG segment
in fiscal 2005, in alphabetical order, were Best Buy, Circuit City, CompUSA, Fry's Electronics, and Micro Center.

In
fiscal 2005, IBM and Dell accounted for 24% and 11% of our net revenues, respectively. In fiscal 2004, IBM and Dell accounted for 18% and 10% of our total net revenues, respectively.
In fiscal 2003, Dell, IBM, Hewlett-Packard and Ingram Micro accounted for 14%, 13%, 11% and 10% of our total net revenues, respectively. Our sales to Ingram Micro are currently made under two separate
master purchase agreements, covering sales to the United States, Canada, Latin America, Asia, and Europe. These master purchase agreements, similar to agreements we may have in place with other
customers, are intended to facilitate purchase transactions between Ingram Micro and Adaptec and do not require Ingram Micro to make purchases from us in any prescribed amount.

We
have entered into several arrangements with IBM over the past several years. In May 2000, we entered into a patent cross-license agreement with IBM, which was subsequently
amended in March 2002, and obtained a release of past infringement claims made prior to January 1, 2000 and received the right to use certain IBM patents from January 1, 2000
through June 30, 2007. Additionally, we granted IBM a

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license
to use all of our patents for the same period. In March 2002, we entered into a non-exclusive, perpetual technology licensing agreement and an exclusive
three-year product supply agreement with IBM. The technology licensing agreement grants us the right to use IBM's ServeRAID technology for our internal and external RAID products. Under
the product supply agreement, we deliver RAID software, firmware and hardware to IBM for use in IBM's xSeries servers. In June 2004, we completed an acquisition and licensing agreement with IBM
for RAID intellectual property and the delivery of Adaptec RAID controllers for IBM's eServer iSeries and pSeries servers or IBM i/p Series. In December 2004, we expanded the i/p Series
relationship with IBM to deliver Adaptec-branded RAID controllers and connectivity products, which were previously branded as IBM, for IBM's i/p Series directly through IBM's sales channel. For
further discussion on agreements between us and IBM, please refer to Notes 2 and 13 to the Notes to Consolidated Financial Statements.

International

We maintain operations in nine countries and sell our products in additional countries through various representatives and distributors. We believe this
geographic diversity allows us to draw on business and technical expertise from an international workforce, provides stability to our operations and revenue streams to offset geographic economic
trends and offers us an opportunity to penetrate new markets.

A
summary of our net revenue and net property, plant and equipment by geographic area is set forth in Note 17 in the Notes to Consolidated Financial Statements. We generated
approximately 65% of our overall gross revenues in 2005 from outside of the United States. These sales include sales to foreign subsidiaries of U.S. companies. A majority of our net revenues
originating outside the United States was from commercial customers rather than foreign governments.

Competition

The markets for all of our products within the OEM, Channel and DSG segments are highly competitive and are characterized by rapid technological advances,
frequent new product introductions, evolving industry and customer standards, and competitive price pressures. Our competitive strategy is to continue to leverage our technical expertise and
concentrate on delivering a comprehensive set of
storage products that simplify storage management for organizations of all sizes. We design advanced features into our products, with a particular emphasis on data transfer rates, software-defined
features and compatibility with major operating systems and most peripherals.

We
believe the principal competitive factors in the markets for our OEM and Channel products are: product price/performance, product features and functionality, reliability, technical
service and support, scalability and interoperability, and brand awareness. In the components portion of our OEM and Channel businesses, we compete primarily with product offerings of Applied Micro
Circuits Corporation (3Ware), Broadcom, LSI Logic and Promise. In the systems portion of our OEM and Channel businesses, we compete with product offerings of Dell, Dot Hill, EMC, HP, LSI Logic
(Engenio), Network Appliance, Xyratex and several other smaller companies.

We
believe the principal competitive factors in the markets for our DSG products are: product price/performance, brand awareness and distribution breadth, reliability, and technical
service and support. In the DSG segment, our SCSI products compete primarily against products using technology alternatives such as USB and FireWire/1394, which are available from companies such as
Belkin and SIIG, and our digital media products compete with product offerings of Hauppauge Computer Works and Pinnacle Systems. Our desktop storage solutions also compete against products using
alternative technologies, such as flash drives and removable media storage, which are available from a variety of companies.

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Backlog

Due to industry practice that allows customers to change or cancel orders with limited advance notice prior to shipment, we do not believe that backlog as of any
particular date is indicative of future sales. Our backlog at March 31, 2005 was approximately $25.3 million, consisting of $19.9 million related to our OEM segment,
$3.7 million related to our Channel segment and $1.7 million related to our DSG segment. Our backlog at March 31, 2004 was approximately $25.5 million. We typically receive
orders for our products within two weeks or less of the desired delivery date and most orders are subject to rescheduling and/or cancellation with little or no penalty. We maintain remote inventory
locations at many of our major OEMs sites. product ordering and delivery occur when the OEM customer accepts our product into their inventory.

Manufacturing

Our manufacturing operations are located in Singapore. Our products make extensive use of standard logic, printed circuit boards and random access memory from
several outside suppliers in addition to our custom designed integrated circuits. We employ Surface Mount Technology Corporation, or SMTC, to manufacture certain of our ServeRAID products that are
sold to IBM. We employ Celestica, Inc. and Jabil Circuit, Inc. to manufacture products related to the IBM i/p Series RAID business. We also employ Quanta Computer, Inc. and
Sanmina-SCI Corporation to manufacture certain products related to the acquisition of Snap Appliance, Inc. We believe that SMTC, Celestica, Jabil Circuit, Quanta Computer and
Sanmina-SCI will be able to meet our anticipated needs for both current and future technologies.

All
semiconductor wafers used in manufacturing our products are processed to our specifications by outside suppliers. We purchase processed wafers from Taiwan Semiconductor Manufacturing
Company, or TSMC and IBM. We believe that TSMC and IBM will be able to meet our anticipated needs for both current and future technologies. Our final assembly and test operations are performed by
Amkor Technology and Advanced Semiconductor Engineering.

Our
manufacturing facility in Singapore has earned ISO-9002 certification, reflecting compliance to a high level of quality in product design, development and production.

Patents and Licenses

We seek to establish and maintain our proprietary rights in our technology and products through the use of patents, copyrights and trade secret laws. We maintain
a patent award program that encourages our engineers to document patentable inventions, and we have applied for and continue to apply for patents in the United States and in foreign countries. As of
March 31, 2005, we had 347 issued patents, expiring between 2007 and 2023, covering various aspects of our technologies. We believe our patents and other intellectual property rights have
value, but we do not consider any single patent to be essential to our business. We also seek to maintain our trade secrets and confidential information by non-disclosure policies and
through the use of appropriate confidentiality agreements.

In
May 2000, we entered into a patent cross-license agreement with IBM. Under the agreement, we received a release from infringement claims prior to January 1, 2000 and
received the right to use certain of IBM's patents through June 30, 2004. In consideration, we paid, in annual installments, an aggregate patent fee of $13.3 million through
June 30, 2004, and we granted IBM a license to use all of our patents for the same period. In March 2002, the patent cross-license agreement was amended to extend the term to
June 30, 2007.

Research and Development

We continually enhance our existing products and develop new products to meet changing customer demands. The high technology industry is characterized by rapid
technological innovation, evolving industry standards, changes in customer requirements and new product introductions and enhancements.

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We
believe that our future performance will depend in large part on our ability to maintain and enhance our current product line, develop new products that achieve market acceptance, maintain
competitiveness and meet an expanding range of customer requirements. To achieve this objective, we intend to continue to leverage our technical expertise and product innovation capabilities to
address storage-access products across a broad range of users and platforms. We also expect to continue to make acquisitions and investments where appropriate.

Approximately
one-third of our employees are engaged in research and development. In fiscal 2005, 2004 and 2003, our research and development expenses were
$113.8 million, or 24% of total net revenues, $102.8 million, or 23% of total net revenues and $118.4 million, or 29% of total net revenues, respectively. Research and development
expenses primarily consist of salaries and related
costs of employees engaged in ongoing research, design and development activities, amortization of purchased technology and subcontracting costs.

We
entered into two strategic alliances in fiscal 2005 with ServerEngines and Vitesse related to a portion of our ASIC development. These alliances are further discussed in "Management's
Discussion and Analysis of Financial Condition and Results of Operation."

We
anticipate that we will continue to have significant research and development expenditures in the future in order to continue to offer innovative, high-quality products
and services to maintain and enhance our competitive position. Our investment in research and development primarily focuses on developing new products for external storage, storage software and server
storage markets. We also invest in research and development of new technologies, including iSCSI, SATA and SAS.

Environmental Laws

Certain of our operations involve the use of substances regulated under various federal, state and international environmental laws. It is our policy to apply
strict standards for environmental protection to sites inside and outside the United States, even if not subject to regulations imposed by local governments.

The
European Parliament has enacted the Restriction on Use of Hazardous Substances Directive, or RoHS Directive, which restricts the sale of new electrical and electronic equipment
containing certain hazardous substances, including lead, which is currently used in some of the products we manufacture. We are working to modify our manufacturing processes to eliminate lead from
products we put on the market by July 1, 2006 as required by the RoHS Directive. This may require additional capital expenditures. In addition, the costs associated with compliance may
negatively impact our results of operations and competitive position. We are also working with our suppliers to redesign or reformulate their components containing lead to reduce or eliminate lead in
our products. Based upon current information available to us, we believe that we will be able to comply with the RoHS Directive within the applicable time period. However, if we do not comply with
this Directive, we may suffer a loss of revenue, be unable to sell in certain markets or countries and suffer competitive disadvantage.

The
European Parliament has also recently finalized the Waste Electrical and Electronic Equipment Directive, or WEEE Directive, which makes producers of electrical and electronic
equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. We may incur financial responsibility for the collection, recycling,
treatment or disposal of products covered under the WEEE Directive. Because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or
penalties associated with non-compliance are unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and
regulatory costs
and insurance costs. We may also be required to take reserves for costs associated with compliance with these regulations.

Employees

As of March 31, 2005, we had 1,525 employees. We believe that we currently have favorable employee relations. None of our employees are represented by a
collective bargaining agreement, nor have we ever experienced work stoppages.

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RISK FACTORS

Our business faces significant risks. The risks described below may not be the only risks we face. Additional risks that we do not yet know of or that we
currently think are immaterial may also impair our business operations. If any of the events or circumstances described in the following risks actually occurs, our business, financial condition or
results of operations could suffer, and the trading price of our common stock could decline.

Our operating results have fluctuated in the past, and are likely to continue to fluctuate, and if our future results are below the
expectations of investors or securities analysts, the market price of our common stock would likely decline significantly.Our quarterly operating results have
fluctuated in the past, and are likely to vary significantly in the future, based on a number of factors related to our industry and the markets for our products. Factors that are likely to cause our
operating results to fluctuate include those discussed in the risk factors below. In addition, in fiscal 2005, our operating results were materially affected by unusual charges, including the
write-off of acquired in-process technology from the acquisitions of the i/p Series RAID business from IBM and Snap Appliance, impairment of goodwill related to the Channel
segment and the recording of a valuation allowance on net deferred tax assets.

Our
operating expenses are largely based on anticipated revenues, and a large portion of our expenses, including those related to rent and salaries, are fixed in the short term. As a
result, lower than anticipated revenues for any reason could cause significant variations in our operating results from quarter to quarter.

Due
to the factors summarized above, and the other risks described in this section, we believe that you should not rely on period-to-period comparisons of our
financial results as an indication of our future performance. In the event that our operating results fall below the expectations of market analysts or investors, the market price of our common stock
could decline substantially.

Our operating results may be adversely affected by unfavorable economic and market conditions and the uncertain geopolitical
environment.Adverse economic conditions in some markets may impact our business, which could result in:



Demand
for our products would likely be negatively affected if demand in the server and network storage markets declines. For example, demand in the server market declined slightly in
fiscal 2002 and fiscal 2003, which contributed to a decline in our net revenues. It is difficult to predict future server sales growth, if any. In addition, other technologies may replace the
technologies used in our existing products and the acceptance of our products using new technologies in the market may not be widespread, which could adversely affect our revenues.

Because our sales are made by means of standard purchase orders rather than long-term contracts, if demand for our customers'
products declines or if our customers do not control their inventories effectively, they may cancel or reschedule shipments previously ordered from us or reduce their levels of purchases from
us.The volume and timing of orders received during a quarter are difficult to forecast. Our customers generally order based on their forecasts and they frequently
encounter uncertain and changing demand for their products. If demand falls below such forecasts or if our customers do not control their inventories effectively, they may cancel or reschedule
shipments previously ordered from us. Our customers have from time to time in the

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past
canceled or rescheduled shipments previously ordered from us, and we cannot assure you that they will not do so in the future. In addition, because our sales are made by means of standard
purchase orders rather than long-term contracts, we cannot assure you that these customers will continue to purchase quantities of our products at current levels, or at all. Historically,
we have set our operating budget based on forecasts of future revenues because we do not have significant backlog. Because much of our operating budget is relatively fixed in the
short-term, if revenues do not meet our expectations, then our financial results will be adversely affected.

We depend on a few key customers and the loss of any of them could significantly reduce our revenues.Historically, a small number of our customers has accounted for a significant portion of our revenues. During fiscal years 2005, 2004 and 2003, sales to the ten customers from which we
received the greatest revenues accounted for approximately 73%, 70% and 73% of our total gross revenues, respectively. In addition, IBM represented 24%, 18% and 13%, respectively, of our total net
revenues in fiscal years 2005, 2004 and 2003, and Dell represented 11%, 10% and 14%, respectively, of our total net revenues in fiscal years 2005, 2004 and 2003. We expect IBM to represent an even
larger percentage of our total net revenues in future periods as a result of our acquisition of the IBM i/p Series RAID business and our supply agreement with IBM. We believe that our major customers
continually evaluate whether or not to purchase products from alternate or additional sources. Additionally, customers' economic and market conditions frequently change. Accordingly, we cannot assure
you that a major customer will not reduce, delay or eliminate its purchases from us, which would likely cause our revenues to decline. In addition, we do not carry credit insurance on our accounts
receivables and any difficulty in collecting outstanding amounts due from our customers, particularly customers that place larger orders or experience financial difficulties, could adversely affect
our revenues and our net income. Because our sales are made by means of standard purchase orders rather than long-term contracts, we cannot assure you that these customers will continue to
purchase quantities of our products at current levels, or at all.

We expect that the products we are developing for the network storage marketplace will be an important component of our anticipated future
growth, and these products may not be accepted by the market or reach the market in a timely fashion.We believe that developing products for the network storage
marketplace will be an important component of our anticipated future growth, and we have attempted to accelerate such product development efforts through acquisitions. For example, in
July 2004, we acquired Snap Appliance, Inc., a provider of NAS products, in February 2004, we acquired Elipsan, a provider of networked storage infrastructure software, and in
April 2003, we acquired Eurologic, a provider of external and networked storage products. The marketplace for advanced storage products is highly competitive. While we are focusing on products
employing iSCSI technology for this market, other companies are also focusing on network storage products based on identified technologies that include,
but are not limited to, iSCSI. As a result, our technology may never be broadly adopted. Even if iSCSI technology achieves broad market acceptance, our early technological advantage in this field may
not afford us the advantages we had anticipated if such acceptance continues to be delayed. In addition, there are substantial risks that known and unknown challenges to successful deployment of our
products, and of products incorporating our products, will cause delays in their reaching the market. If iSCSI technology and our network storage products, and our customers' products using our
technology, do not achieve a broad level of market acceptance, or if we encounter substantial delays in entering the market, our growth will likely be impaired.

Our dependence on new products may cause our net revenues to fluctuate or decline.Our future success
significantly depends upon our completing and introducing enhanced and new products at competitive prices and performance levels in a timely manner. The success of new product introductions depends on
several factors, including the following:



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Our
product life cycles in each of our segments may be as brief as 12 months. As a result, we believe that we will continue to incur significant expenditures for research and
development in the future. We may fail to identify new product opportunities and may not develop and bring new products to market in a timely manner. In addition, products or technologies developed by
others may render our products or technologies obsolete or noncompetitive, or our targeted customers may not select our products for design or integration into their products. The failure of any of
our new product development efforts could have an adverse effect on our business and financial results.

We
have introduced RAID-enabled products based on the next generation SATA technology and delivered our products based on SAS technology to certain major OEMs for
testing and integration. We will not succeed in generating significant revenues from our new SATA and SAS technology products if the market does not adapt to these new technologies, which would, over
time, adversely affect our net revenues and operating results.

Our reliance on industry standards and technological changes in the marketplace may cause our net revenues to fluctuate or
decline.The computer industry is characterized by various, evolving standards and protocols. We design our products to conform to certain industry standards and
protocols such as the following:





If
user acceptance of these standards declines, or if new standards emerge, and if we do not anticipate these changes and develop new products, these changes could adversely affect our
business and financial results.

If we lose the cooperation of other hardware and software producers whose products are integral to ours, our ability to sustain or grow
our revenues could be adversely affected.We must design our products to operate
effectively with a variety of hardware and software products supplied by other manufacturers, including the following:



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We
depend on significant cooperation from these manufacturers to achieve our design objectives and develop products that operate successfully with their products. These companies could,
from time to time, elect to make it more difficult for us to design our products for successful operability with their products. For example, if one or more of these companies were to determine that
as a result of competition or other factors our technology or products would not be broadly accepted by the markets we target, these companies may no longer work with us to plan for new products and
new generations of our products, which would make it more difficult to introduce products on a timely basis or at all. Further, some of these companies might decide not to continue to offer products
that are compatible with our technology and our markets could contract. If any of these events were to occur, our revenue could be adversely affected.

We are subject to various environmental laws and regulations that could impose substantial costs upon us and may adversely affect our
business.The European Parliament has enacted the Restriction on Use of Hazardous Substances Directive, or RoHS Directive, which restricts the sale of new
electrical and electronic equipment containing certain hazardous substances, including lead that is currently used in some of the products we manufacture. We are working to modify our manufacturing
processes to eliminate lead from products we sell by July 1, 2006, as required by the RoHS Directive. This may require us to make additional capital expenditures. In addition the costs
associated with compliance may negatively impact our operating results and competitive position. We are also working with our suppliers to redesign or reformulate their components containing lead to
reduce or eliminate lead in our products. If we are unable to comply with this Directive, we may suffer a loss of revenue, be unable to sell affected products in certain markets or countries and be at
a competitive disadvantage.

The
European Parliament has also recently finalized the Waste Electrical and Electronic Equipment Directive, or WEEE Directive, which makes producers of electrical and electronic
equipment financially responsible for specified collection, recycling, treatment and disposal of past and future covered products. We may incur financial responsibility for the collection, recycling,
treatment or disposal of products covered under the WEEE Directive. Because the EU member states have not fully implemented the WEEE Directive, the nature and extent of the costs to comply and fees or
penalties associated with non-compliance are unknown at this time. Costs to comply with the WEEE Directive and similar future legislation, if applicable, may also include legal and
regulatory costs and insurance costs. We may also be required to take reserves for costs associated with compliance with these regulations.

We entered into strategic alliances with Vitesse for the development of our SAS ROC product and with ServerEngines to advance our
development of iSCSI products, and if these companies fail to develop and bring new products to market in a timely manner it could result in an adverse effect on our business and financial
results.In January 2005, we entered into a strategic alliance with Vitesse for it to develop and market the next generation of our SAS products. In
March 2005, we entered into a strategic alliance with ServerEngines to develop and market the next generation of our IP storage products, such as 10Gb iSCSI. Accordingly, we are at risk that
Vitesse and ServerEngines may encounter challenges in fulfilling their responsibilities under these alliances, such as timely completing and introducing new product designs, maintaining the quality of
new products, minimizing product costs, differentiating new products from those of our competitors and achieving market acceptance of our products. The failure of this new product development effort
could have an adverse effect on our business and financial results.

If we do not provide adequate support during our customers' design and development stage, or if we are unable to provide such support in a
timely manner, we may lose revenues to our competitors.Certain of our products are designed to meet our customers' specifications and, to the extent we are not
able to meet these expectations in a timely manner or provide adequate support during our customers' design and development stage, our customers may choose to buy similar products from another
company. If this were to occur we may lose revenues and market share to our competitors.

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If we are unable to compete effectively, our net revenues could be adversely affected.The markets
for all of our products are intensely competitive and are characterized by the following:



Consequently,
we must continue to enhance our products on a timely basis to keep pace with market demands. If we do not do so, or if our competition is more effective in developing
products that meet the needs of our existing and potential customers, we may lose market share and not participate in the future growth of our target markets. For example, intense competition in the
transition from products employing Ultra 160 technology to products employing Ultra 320 technology has adversely affected revenues from our SCSI products. Our future success will depend on the level
of acceptance of our external storage products and products based on the next generation SATA and SAS technologies by new and existing customers. In addition, we expect that our future success will
depend significantly on our ability to participate in the ongoing development of the network storage market in which we face intense competition from other companies that are also focusing on
networked storage products.

We
cannot assure you that we will have sufficient resources to accomplish all of the following:



Costs associated with acquisitions or strategic alliances may adversely affect our results of operations, which could be exacerbated if we
are unable to integrate the acquired companies, products or technologies.In fiscal 2005, we acquired Snap Appliance, and the i/p Series RAID business from IBM In
fiscal 2004, we acquired Elipsan, ICP vortex, a provider of a broad range of hardware and software RAID data protection products, and Eurologic, a provider of external and networked storage products.
In addition, we enter into strategic alliances from time to time with other companies. For example, we entered into a technology licensing agreement with IBM in fiscal 2002. As part of our overall
strategy, we may continue to acquire or invest in complementary companies, products or technologies and enter into strategic alliances with other companies. In order to be successful in these
activities, we must:



The
benefits of acquisitions or strategic alliances may prove to be less than anticipated and may not outweigh the costs reported in our financial statements. Completing any potential
future acquisitions or strategic alliances could cause significant diversions of management time and resources. If we acquire new

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businesses,
products or technologies in the future, we may be required to assume warranty claims or other contingent liabilities, including liabilities unknown at the time of acquisition, and amortize
significant amounts of other intangible assets and, over time, recognize significant charges for impairment of goodwill, other intangible assets or other losses. If we consummate any potential future
acquisitions in which the consideration consists of stock or other securities, our existing stockholders' ownership may be significantly diluted. If we proceed with any potential future acquisitions
in which the consideration is cash, we may be required to use a substantial portion of our available cash. In addition, we may be required to invest significant resources in order to perform under a
strategic alliance or to complete an acquisition, which could adversely affect our results of operations, at least in the short-term, even if we believe the strategic alliance or
acquisition will benefit us in the long-term. We may not be successful in overcoming these risks or any other problems encountered in connection with these or other business combinations,
investments or strategic alliances. These transactions may adversely affect our business, financial position and operating results.

Product quality problems could lead to reduced revenues and gross margins.We produce highly complex
products that incorporate leading-edge technologies, including both hardware and software. Software often contains "bugs" which can interfere with expected operations. We cannot assure you
that our pre-shipment testing programs will be adequate to detect all defects which might interfere with customer satisfaction, reduce sales opportunities, or affect our gross margins if
the costs of remedying the problems exceed reserves established for that purpose. An inability to cure a product defect could result in the failure of a product line, and withdrawal, at least
temporarily, from a product or market segment, damage to our reputation, inventory costs, product reengineering expenses, and a material impact on revenues and gross margins.

If there is a shortage of components used in our customers' products, our sales may decline, which could adversely affect our results of
operations and financial position.If our customers are unable to purchase certain components which are embedded into their products, their demand for our products
may decline. For example, beginning in the fourth quarter of fiscal 2005, we experienced the impact of other companies' enterprise drive shortages, which reduced the demand for our
SCSI-related products from our OEM and channel customers. This negatively affected our revenues in the fourth quarter of fiscal 2005 and we expect that it will impact the first quarter of
fiscal 2006. Similar shortages of components used in our customers' products could adversely affect our net revenues and financial results in future periods.

The manufacture and introduction of our products is highly complex.We confront challenges in the
manufacturing process that require us to:



We
cannot assure you that problems with our manufacturing process may not occur in the future. If any such problems with our manufacturing process were to occur, we might not be able to
meet the demands of our customers, which could harm our reputation, result in the loss of customers and adversely affect our net revenues and financial results in future periods.

We currently purchase all of the finished production silicon wafers used in our products from wafer suppliers, and if they fail to meet
our manufacturing needs, it would delay our production and our product shipments to

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customers and negatively affect our operations.Independent foundries manufacture to our specifications all of the finished silicon wafers used for our products.
We currently purchase finished production silicon wafers used in our products from Taiwan Semiconductor Manufacturing Company, or TSMC, and IBM. The manufacture of semiconductor devices is sensitive
to a wide variety of factors, including the following:



We
cannot assure you that manufacturing problems may not occur in the future. A shortage of raw materials or production capacity could lead our wafer suppliers to allocate available
capacity to other customers. Any prolonged inability to obtain wafers with competitive performance and cost attributes, adequate yields or timely deliveries would delay our production and our product
shipments, and could have an adverse effect on our business and financial results. We expect that our wafer suppliers will continually seek to convert their processes for manufacturing wafers to more
advanced process technologies. Such conversions entail inherent technological risks that can affect yields and delivery times. If for any reason the wafer suppliers we use are unable or unwilling to
satisfy our wafer needs, we will be required to identify and qualify additional suppliers. Additional wafer suppliers may be unavailable, may take significant amounts of time to qualify or may be
unable to satisfy our requirements on a timely basis.

We have entered into an expanded relationship with IBM and if the revenue streams are less than anticipated we may incur an impairment of
our asset.In December 2004, we entered into an expanded relationship with IBM that enables us to sell certain Adaptec-branded RAID controllers and
connectivity products, which were previously branded as IBM, for IBM's i/p Series directly through IBM's sales channel. As part of this agreement, we committed to payments totaling up to
$52.1 million. If, in the future, the revenue we expect to generate from this agreement is less than we currently anticipate, we could incur an impairment of this asset which could adversely
affect our financial results. For further discussion on
the expanded relationship with IBM, please refer to Note 13 to the Notes to Consolidated Financial Statements.

We have entered into an expanded relationship with IBM and if we do not fulfill our responsibilities under this agreement, it could result
in a loss of revenues or reduced gross margins.In June 2004, we entered into an expanded relationship with IBM to supply external storage products and
further expanded this relationship in December 2004. We may encounter challenges in fulfilling our responsibilities under this expanded relationship such as, timely completion and introduction
of product designs to meet the specifications of IBM, quality of new products introduced, product costs, sales forecasting, material planning and inventory management to meet its demand forecast. If
we do not fulfill our responsibilities under this agreement, product shipments could be affected, which could result in delayed or lost revenues and customer dissatisfaction. In addition, if we are
not successful in achieving our targeted costs and pricing assumptions, we could continue to incur losses from the sale of our products or reduced gross margins. For example, in fiscal 2005, gross
margins were adversely impacted due to negative margins obtained from our new external storage products sold to IBM. Costs associated with our new external storage products sold to IBM were higher as
a result of increased costs for initial components purchases from suppliers, start-up production costs, high overhead costs associated with lower volumes and the cost of expediting
components from suppliers and products to IBM. For further discussion on the expanded relationship with IBM, please refer to Notes 2 and 13 to the Notes to Consolidated Financial Statements.

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We depend on subcontractors, and if they fail to meet our manufacturing needs, it could delay shipments of our products and result in the
loss of customers.We rely on subcontractors for the assembly and packaging of the integrated circuits included in our products and for the assembly and
manufacturing of a portion of our systems products. We have no long-term agreements with our assembly and packaging subcontractors. We have, from time to time, used board subcontractors to
better balance production runs and capacity. For example, we employ Quanta Computer, Inc. and Sanmina-SCI Corporation to manufacture certain products related to the acquisition of
Snap Appliance. We also employ Celestica, Inc. and Jabil Circuit, Inc. to manufacture products related to the IBM i/p Series RAID business. We cannot assure you these subcontractors will
continue to be able and willing to meet our requirements for these components or services. For example, in the third quarter of fiscal 2005, Quanta Computer, Inc. could not meet our
manufacturing needs and as a result initial product delivery dates committed to customers were not met. Any significant disruption in supplies from or degradation in the quality of components or
services supplied by, these subcontractors could delay shipments and result in the loss of customers or revenues, which could have an adverse effect on our financial results.

We depend on the efforts of our distributors, which if reduced, could result in a loss of sales of our products in favor of competitive
offerings.We derived approximately 38% of our gross revenues for fiscal 2005 from independent distributor and reseller channels. Our financial results could be
adversely affected if our relationships with these distributors or resellers were to deteriorate or if the financial condition of these distributors or resellers were to decline.

Our
distributors generally offer a diverse array of products from several different manufacturers. Accordingly, we are at risk that these distributors may give higher priority to selling
products from other suppliers. A reduction in sales efforts by our current distributors could adversely affect our business and financial results. Our distributors build inventories in anticipation of
future sales, and if such sales do not occur as rapidly as they anticipate, our distributors will decrease the size of their product orders. If we decrease our price protection or
distributor-incentive programs, our distributors may also decrease their orders from us. In addition, we have from time to time taken actions to reduce levels of products at distributors and may do so
in the future. These actions may affect our net revenues and negatively affect our financial results.

We reorganized our business segments to be focused on customers and have planned significant system enhancements and improvements, and
these changes could adversely impact our business if not adequately managed and controlled.In the second quarter of fiscal 2005 and in response to the Snap
Appliance acquisition in July 2004, we refined our internal organizational structure to operate in three reportable segments: OEM, Channel and DSG. Whereas historically our former SSG and SNG
segments each offered distinct products across our entire customer base, the new OEM and Channel segments offer an integrated set of products to customers that are specific to the segment. The
reorganization has placed demands on our management, operational and financial infrastructure. In addition, management is in the process of enhancing certain systems and processes, such as in the
supply chain area. These system enhancements and improvements require expenditures and allocation of management resources. If these improvements are not implemented successfully, our ability to manage
our new organization could be impaired. In addition, we may be required to incur additional expenditures to address these issues, which could harm our financial position.

If we do not meet our restructuring objectives, we may have to implement additional plans in order to reduce our operating costs and may,
as a result, incur additional material restructuring charges.We have implemented several restructuring plans to reduce our operating costs in fiscal 2005, fiscal
2004 and fiscal 2003, and recorded related restructuring charges of $5.9 million, $4.3 million and $14.3 million, respectively. The plans included primarily the reduction of our
workforce and the consolidation of our manufacturing operations in Singapore. The goals of these plans were to support future growth opportunities, focus on investments that grow revenues and increase
operating margins. If we do not meet our restructuring

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objectives,
we may have to implement additional restructuring plans to reduce our operating costs, which could cause us to incur material restructuring charges. Further, these restructuring plans may
not achieve the goals we had in implementing them due to such factors as significant costs or restrictions that may be imposed in some international locales on workforce reductions and a potential
adverse effect on employee morale that could harm our efficiency and our ability to act quickly and effectively in the rapidly changing technology markets in which we sell our products.

Some of our products contain "open source" software, and any failure to comply with the terms of one or more of these open source licenses
could negatively affect our business.Some of our products are distributed with software licensed by its authors or other third parties under so-called
"open
source" licenses, including, for example, the GNU General Public License, or GPL, GNU Lesser General Public License, or LGPL, the Mozilla Public License, the BSD License, and the Apache License. Some
of those licenses may require as a condition of the license that we make available source code for modifications or derivative works we create based upon, incorporating, or using the open source
software, that we provide notices with our products, and/or that we license such modifications or derivative works under the terms of a particular open source license or other license granting third
parties certain rights of further use. If an author or other third party that distributes such open source software were to allege that we had not complied with the conditions of one or more of those
open source licenses, we could be required to incur legal expenses in defending against such allegations, and if our defenses were not successful we could be enjoined from distribution of the products
that contained the open source software and required to either make the source code for the open source software available, to grant third parties certain rights of further use of our software, or to
remove the open source software from our products, which could disrupt our distribution and sale of some of our products. In addition, if we combine our proprietary software with open source software
in a certain manner, we could under some of the open source licenses be required to release the source code of our proprietary software. If an author or other third party that distributes open source
software were to obtain a judgment against us based on allegations that we had not complied with the terms of any such open source licenses, we could also be subject to liability for copyright
infringement damages and breach of contract for our past distribution of such open source software.

Our operations depend on key personnel, the loss of whom could affect the growth and success of our
business.In order to be successful, we must retain and motivate our executives, the general managers of our business segments, our principal engineers and other
key employees, including those in managerial, technical, marketing and information technology support positions. In particular, our product generation efforts depend on hiring and retaining qualified
engineers. Competition for experienced management, technical, marketing and support personnel remains intense. For example, we transitioned certain research and development efforts to India, where we
have experienced significant competition in our efforts to attract and retain qualified engineers. In addition, with the exception of a few employees with whom we entered into employment agreements in
connection with acquisition transactions, we do not have employment contracts with our key employees, including any of our executive officers. The loss of any of these key employees could have a
significant impact on our operations. We also must continue to motivate employees and keep them focused on our strategies and goals, which may be particularly difficult due to morale challenges posed
by workforce reductions and general uncertainty.

Our international operations involve risks, and may be subject to political or other non-economic barriers to our being able
to sell our products in certain countries, local economic conditions that reduce demand for our products among our target markets, and potential disruption in the supply of necessary
components.Many of our subcontractors are primarily located in Asia and we have sales offices and customers located throughout Europe, Japan and other countries.
Our international operations and sales are subject to political and economic risks, including political instability, currency controls, changes in import/export regulations, tariffs and freight rates.
In addition, because our primary wafer supplier, TSMC, is located in Taiwan, we may be subject to certain risks resulting from political instability in Taiwan, including conflicts between Taiwan and
the People's Republic of China. These and other international risks could result in the creation

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of
political or other non-economic barriers to our being able to sell our products in certain countries, create local economic conditions that reduce demand for our products among our
target market or expose us to potential disruption in the supply of necessary components or otherwise adversely affect our ability to generate revenue and operate effectively.

We depend on third parties to transport our products.We rely on independent freight forwarders to
move our products between manufacturing plants and our customers. Any transport or delivery problems because of their errors, or because of unforeseen interruptions in their activities due to factors
such as strikes, political instability, terrorism, natural disasters and accidents, could adversely affect our business, financial condition and results of operations and ultimately impact our
relationship with our customers.

If the carrying value of our long-lived assets is not recoverable, an impairment loss must be recognized which would adversely
affect our financial results.Certain events or changes in circumstances would require us to assess the recoverability of the carrying amount of our
long-lived assets. In fiscal 2005, we recorded a goodwill impairment charge of $52.3 million related to our Channel segment. In fiscal 2004, we recorded an impairment charge of
$5.0 million related to certain properties classified as held-for sale and a charge of $1.0 million relating to the decline in value of a minority investment. In fiscal 2003,
we recorded an impairment charge of $1.5 million relating to the decline in value of minority investments. In fiscal 2002, we recorded impairment charges of $77.6 million relating to
technology acquired in a prior acquisition and the decline in value of minority investments. We will continue to evaluate the recoverability of the carrying amount of our long-lived
assets, and we may incur substantial impairment charges which could adversely affect our financial results.

If actual results or events differ materially from those contemplated by us in making estimates and assumptions, our reported financial
condition and results of operations for future periods could be materially affected.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 amounts reported in the consolidated financial statements and
accompanying notes. For example, we have identified key accounting estimates in our Critical Accounting Policies, which include revenue, inventory, goodwill and income taxes. In addition,
Note 1 of the Notes to Consolidated Financial Statements describes the significant accounting policies essential to preparing our
consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the reported amounts and disclosures. Although we believe that our
judgments and estimates are appropriate and correct, actual future results may differ materially from our estimates.

If we are unable to protect and enforce our intellectual property rights, we may be unable to compete
effectively.Although we actively maintain and defend our intellectual property rights, we may be unable to adequately protect our proprietary rights. In addition,
the laws of certain territories in which our products are or may be developed, manufactured or sold, including Asia and Europe, may not protect our products and intellectual property rights to the
same extent as the laws of the United States. Because we conduct a substantial portion of our operations in Singapore and other locations outside of the United States and sell to a worldwide customer
base, we are more dependent on our ability to protect our intellectual property in international environments than would be the case if a larger portion of our operations were domestic.

Despite
our efforts, we may be unable to prevent third parties from infringing upon or misappropriating our intellectual property, which could harm our business and ability to compete
effectively. We have from time to time discovered counterfeit copies of our products being manufactured or sold by others. Although we have programs to detect and deter the counterfeiting of our
products, significant availability of counterfeit products could reduce our revenues and damage our reputation and goodwill with customers.

Third parties may assert infringement claims against us, which may be expensive to defend and could divert our
resources.From time to time, third parties assert exclusive patent, copyright and other intellectual

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property
rights to our key technologies, and we expect to continue to receive such claims in the future. For example, we entered into a patent cross-license agreement with IBM in May 2000.
Under this agreement, which was amended in March 2002, we received a release from infringement claims prior to January 1, 2000 and received the right to use certain of IBM's patents
through June 30, 2007. In consideration, we paid, in annual installments, an aggregate patent fee of $13.3 million through June 30, 2004. The risks of our receiving additional
claims from third parties may be enhanced in periods such as the one that we are currently entering where we are beginning to offer product lines employing new technologies relative to our existing
products.

We
cannot assure you that third parties will not assert other infringement claims against us, directly or indirectly, in the future, that assertions by third parties will not result in
costly litigation or that we would prevail in such litigation or be able to license any valid and infringed intellectual property from third parties on commercially reasonable terms. These claims may
be asserted in respect of intellectual property that we own or that we license from others. In addition to claims brought against us by third parties, we may also bring litigation against others to
protect our rights. Intellectual property litigation, regardless of the outcome, could result in substantial costs to us and diversion of our resources, and could adversely affect our business and
financial results.

We may be subject to a higher effective tax rate that could negatively affect our results of operations and financial
position.Our effective tax rate is benefited by a Singapore tax holiday relating to certain of our products. The tax holiday package, which is effective until
fiscal 2010, provides that profits derived from certain products may be exempt from tax, subject to certain conditions. If we do not meet the conditions and requirements of the tax holiday in
Singapore, our effective tax rate may increase, which would adversely affect our financial results. Additionally, we held approximately $50 million of cash, cash equivalents and marketable
securities at our subsidiary in Singapore at March 31, 2005. During the fourth quarter of fiscal 2005, we repatriated $360.6 million of cash from Singapore to the United States in
connection with the American Jobs Creation Act of 2004 which provides a one-time deduction of 85% for certain dividends from controlled foreign corporations. If the amount repatriated does
not qualify for the one-time deduction, we could incur additional income taxes at up to the United States Federal statutory rate of 35%, which would negatively affect our results of
operations and financial condition. Further, if our subsidiary in Singapore incurs losses in excess of their liquidity we may need to loan our subsidiary in Singapore money that could result in
unfavorable tax consequences.

We may be required to pay additional federal income taxes which could negatively affect our results of operations and financial
position.On December 15, 2000, we received a statutory notice of deficiency from the IRS with respect to our Federal income tax return for fiscal 1997. We
filed a Petition with the United States Tax Court on March 14, 2001 contesting the asserted deficiencies and settlement agreements have been filed with the United States Tax Court on all but
one issue. In addition, the IRS is currently auditing our Federal income tax returns for fiscal 1998 through fiscal 2001. We have resolved all issues other than the rollover impact of any potential
resolution on the remaining fiscal 1997 issue and tax credits that were generated but not used in subsequent years that may be carried back. While we believe we have meritorious defenses against the
asserted deficiencies and any proposed adjustments, and that sufficient taxes have been provided, we cannot predict the final outcome of these matters, and the final resolution could adversely affect
our results of operations and financial position.

We may be engaged in legal proceedings that could cause us to incur unforeseen expenses and could occupy a significant amount of our
management's time and attention.From time to time we are subject to litigation or claims that could negatively affect our business operations and financial
position. Such disputes could cause us to incur unforeseen expenses, could occupy a significant amount of our management's time and attention, and could negatively affect our business operations and
financial position.

We finance our capital expenditure needs from operating cash flows and capital market financing, and if we need to seek additional
financing, it may not be available on favorable terms.In order to finance strategic

22

---



acquisitions,
capital asset acquisitions and other general corporate needs, we rely, in part, on operating cash flows and the capital markets. Historically, we have been able to access capital
markets, but this does not necessarily guarantee that we will be able to access these markets in the future or at terms that are acceptable to us. The availability of capital in these markets is
affected by several factors, including geopolitical risk, the interest rate environment and the condition of the economy as a whole. In addition, our own operating performance, capital structure and
expected future performance impacts our ability to raise capital. We believe that our current cash, cash equivalents, short-term investments and future cash provided by operations will be
sufficient to fund our needs for at least the next twelve months. However, if our operating performance falls below expectations, we may need additional funds, which may not be available on favorable
terms, if at all.

We are exposed to fluctuations in foreign currency exchange rates.Because a significant portion of
our business is conducted outside the United States, we face exposure to adverse movements in non-United States currency exchange rates. These exposures may change over time as business
practices evolve and could have an adverse impact on our financial results and cash flows. Historically, our exposures have related to non-dollar-denominated operating expenses in Europe
and Asia. We began Euro-denominated sales to our distribution customers in the European Union in the fourth quarter of fiscal 2003. Additionally, we purchase a substantial portion of our
raw materials and manufacturing equipment from foreign suppliers, and incur labor and other operating costs in foreign currencies, particularly in our Singapore manufacturing facility. An increase in
the value of the dollar could increase the real cost to our customers of our products in markets outside the United States where we sell in dollars, and a weakened dollar could increase the cost of
local operating expenses and procurement of raw materials to the extent we must purchase components in foreign currencies.

We hold minority interests in privately held venture funds, and if these venture funds face financial difficulties in their operations,
our investments could be impaired.We continue to hold minority interests in privately held venture funds. At March 31, 2005, the carrying value of such
investments aggregated $3.3 million. We have also committed to provide additional funding of up to $0.5 million. These investments are inherently risky because these venture funds invest
in companies that may still be in the development stage or depend on third parties for financing to support their ongoing operations. In addition, the markets for the technologies or products of these
companies are typically in the early stages and may never develop. If these companies do not have adequate cash funding to support their operations, or if they encounter difficulties developing their
technologies or products, the venture funds' investment in these companies may be impaired, which in turn, could result in impairment of our investment in these venture funds.

Our spin-off of Roxio Inc., which is now known as Napster Inc., may have potential subsequent tax liabilities
that could negatively affect our results of operations.Pursuant to our distribution of the Roxio, Inc. common stock, we received an opinion from
PricewaterhouseCoopers LLP, or PwC, regarding the tax-free nature of the transaction to us and to our stockholders under
Section 355 of the Internal Revenue Code. The validity of the PwC opinion relating to the qualification of the distribution as a tax-free transaction is subject to factual
representations and assumptions. We are not aware of any facts or circumstances that would cause such representations and assumptions to be untrue. In addition, the opinion of PwC is not binding on
the IRS. If Napster or we fail to conform to the requirements set forth in the IRS regulations, it could cause the distribution to be taxable to us and to our stockholders, and our financial results
could be adversely affected.

We may have potential business conflicts of interest with Roxio, which is now known as Napster, with respect to our past and ongoing
relationships, and we may not resolve these conflicts on terms favorable to us.Conflicts of interest may arise between Napster and us in areas relating to our
past and ongoing relationship, including tax, indemnification and other matters arising from the separation. These and other business conflicts could adversely affect the growth of our business in the
future.

23

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Changes in securities laws and regulations have increased and may continue to increase our
costs.Changes in the laws and regulations affecting public companies, including the provisions of the Sarbanes-Oxley Act of 2002 and rules promulgated by the
Securities and Exchange Commission, have increased and may continue to increase our expenses as we evaluate the implications of these rules and devote resources to respond to their requirements. In
particular, we incurred additional administrative expense to implement Section 404 of the Sarbanes-Oxley Act, which requires management to report on, and our Independent Registered Public
Accounting Firm to attest to, our internal control over financial reporting.

In
addition, The Nasdaq National Market, on which our common stock is listed, has also adopted comprehensive rules and regulations relating to corporate governance. These laws, rules and
regulations have increased and will continue to increase the scope, complexity and cost of our corporate governance, reporting and disclosure practices. We also expect these developments to make it
more difficult and more expensive for us to obtain director and officer liability insurance in the future, and we may be required to accept reduced coverage or incur substantially higher costs to
obtain coverage. Further, our board members, Interim Chief Executive Officer and Chief Financial Officer could face an increased risk of personal liability in connection with the performance of their
duties. As a result, we may have difficultly attracting and retaining qualified board members and executive officers, which would adversely affect our business.

Internal control deficiencies or weaknesses that are not yet identified could emerge.Over time we
may identify and correct deficiencies or weaknesses in our internal control over financial reporting and, where and when appropriate, report on the identification and correction of these deficiencies
or weaknesses. However, the internal control procedures can provide only reasonable, and not absolute, assurance that deficiencies or weaknesses are identified. Deficiencies or weaknesses that are not
yet identified could emerge and the identification and corrections of these deficiencies or weaknesses could have a material impact on our results of operations.

Internal control issues that appear minor now may later become material weaknesses.We are required
to publicly report on deficiencies or weaknesses in our internal control over financial reporting that meet a materiality standard as required by law. Management may, at a point in time, accurately
categorize a deficiency or weakness as immaterial or minor and therefore not be required to publicly report such deficiency or weakness. Such determination, however, does not preclude a change in
circumstances such that the deficiency or weakness could, at a later time, become material weaknesses that could have a material impact on our results of operations.

We may encounter natural disasters, which could cause disruption to our employees or interrupt the manufacturing process for our
products.Our operations could be subject to natural disasters and other business disruptions, which could seriously harm our revenues and financial condition and
increase our costs and expenses. Our corporate headquarters are located in California, near major earthquake faults. Additionally, our primary wafer supplier, TSMC, is located in Taiwan, which has
experienced significant earthquakes in the past. A severe earthquake could cause disruption to our employees or interrupt the manufacturing process, which could affect TSMC's ability to supply wafers
to us, which would negatively affect our business and financial results. The ultimate impact on us and our general infrastructure of being located near major earthquake faults is unknown, but our net
revenues and financial condition and our costs and expenses could be significantly impacted in the event of a major earthquake.

Manmade problems such as computer viruses or terrorism may disrupt our operations and harm our operating
results.Despite our implementation of network security measures, our servers are vulnerable to computer viruses, break-ins, and similar disruptions
from unauthorized tampering with our computer systems. Any such event could have an adverse effect on our business, operating results, and financial condition. In addition, the effects of war or acts
of terrorism could have an adverse effect on our business, operating results, and financial condition. In addition, as a company with headquarters and significant

24

---



operations
located in the United States, we may be impacted by actions against the United States. We are predominantly uninsured for losses and interruptions caused by terrorist acts and acts of war.

We may experience significant fluctuations in our stock price, which may, in turn, significantly affect the trading price of our
convertible notes.Our stock has experienced substantial price volatility, particularly as a result of quarterly variations in our operating results, the published
expectations of analysts, and as a result of announcements by our competitors and us. In addition, the stock market has experienced price and volume fluctuations that have affected the market price of
many technology companies, in particular, and that have often been unrelated to the operating performance of such companies. In addition, the price of our securities may also be affected by general
global, economic and market conditions, and the cost of operations in one or more of our product markets. While we cannot predict the individual effect that these factors may have on the price or our
securities, these factors, either individually or in the aggregate, could result in significant variations in the price of our common stock during any given period of time. These fluctuations in our
stock price also impact the price of our
outstanding convertible securities and the likelihood of the convertible securities being converted into our common stock.

25

---





Item 2.Properties

Our headquarters are located at 691 South Milpitas Boulevard, Milpitas, California. As of March 31, 2005, we owned and leased various properties in the
United States and in 8 foreign countries totaling approximately 1,000,000 square feet, of which approximately 344,000 was leased/subleased or available to lease/sublease to third parties. These
building and land leases expire at varying dates between fiscal 2012 and fiscal 2028, respectively, and include renewals at our option.

The
table below is a summary of the facilities we owned and leased at March 31, 2005:

|       |  |               |  | # of Buildings |  | Location       |  | Building
Sq. Ft. |   | Use                                                                                                                                                                                   
|------ |  | ------------- |  | -------------- |  | -------------- |  | ---------------- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------
|Owned  |  | US            |  | 5              |  | California     |  | 319,000          | A | Corporate offices, research and development, technical support, sales, marketing and administrative and a portion of the buildings are leased or available for lease to third parties.
|       |  | International |  | 1              |  | Singapore      |  | 221,000          | B | Manufacturing, research and development, sales, warehousing and a portion leased to third parties.                                                                                    
|Leased |  | US            |  | 6              |  | California     |  | 155,000          | C | Warehouse, sales, technical support and a portion of the buildings are leased or available for lease to third parties.                                                                
|       |  |               |  | 2              |  | Colorado       |  | 16,000           |   | Research and development and techincal support.                                                                                                                                       
|       |  |               |  | 1              |  | Florida        |  | 100,000          | D | Engineering, technical support, sales, marketing and administrative and a portion subleased to third parties.                                                                         
|       |  |               |  | 2              |  | Minnesota      |  | 13,000           |   | Research and development and techincal support.                                                                                                                                       
|       |  |               |  | 1              |  | New Hampshire  |  | 67,000           | E | Subleased to third parties.                                                                                                                                                           
|       |  |               |  | 1              |  | North Carolina |  | 27,000           |   | Research and development and techincal support.                                                                                                                                       
|       |  |               |  | 2              |  | Texas          |  | 4,000            |   | Sales office.                                                                                                                                                                         
|       |  |               |  | 2              |  | Washington     |  | 400              |   | Research and development and techincal support.                                                                                                                                       
|       |  | International |  | 1              |  | Australia      |  | 500              |   | Sales office.                                                                                                                                                                         
|       |  |               |  | 1              |  | China          |  | 2,000            |   | Sales office.                                                                                                                                                                         
|       |  |               |  | 3              |  | England        |  | 21,000           | F | Research and development, sales and a portion is subleased or available for sublease to a third party.                                                                                
|       |  |               |  | 1              |  | France         |  | 4,000            |   | Sales office.                                                                                                                                                                         
|       |  |               |  | 1              |  | Germany        |  | 19,000           |   | Research and development, technical design, technical support and sales.                                                                                                              
|       |  |               |  | 2              |  | India          |  | 35,000           |   | Technical design.                                                                                                                                                                     
|       |  |               |  | 1              |  | Japan          |  | 8,000            |   | Sales, marketing and technical support.                                                                                                                                               

---

We do not separately track our major facilities by operating segments nor are the segments evaluated under these criteria. Substantially all of
the properties are used at least in part by more than one of our segments and we retain the flexibility to use each of the properties in whole or in part for each of the segments.

We
believe our existing facilities and equipment are well maintained and in good operating condition, and we believe our facilities are sufficient to meet our needs for the foreseeable
future. Our future

26

---



facilities
requirements will depend upon our business, and we believe additional space, if required, can be obtained on reasonable terms.

Item 3.Legal Proceedings

On June 27, 2000, we received a statutory notice of deficiency from the IRS with respect to our Federal income tax returns for fiscal 1994 to 1996. We
filed a Petition with the United States Tax Court on September 25, 2000, contesting the asserted deficiencies. In December 2001, settlement agreements were filed with the United States
Tax Court reflecting a total of $9.0 million of adjustments and an allowance of $0.5 million in additional tax credits. The outcome did not have a material adverse effect on our
financial position or results of operations, as sufficient tax provisions had been made. The final Tax Court stipulation will be filed when the subsequent audit cycles are completed. Tax credits that
were generated but not used in subsequent years may be carried back to the fiscal 1994 to 1996 audit cycle.

On
December 15, 2000, we received a statutory notice of deficiency from the IRS with respect to our Federal income tax return for fiscal 1997. We filed a Petition with the United
States Tax Court on March 14, 2001 contesting the asserted deficiencies. Settlement agreements have been filed with the United States Tax Court on all but one issue. We believe that the final
outcome of all issues will not have a material adverse impact on our financial position or results of operations, as we believe that we have meritorious defense against the asserted deficiencies and
any proposed adjustments and that we have made sufficient tax provisions. However, we cannot predict with certainty how these matters will be resolved and whether we will be required to make
additional payments.

In
addition, the IRS is currently auditing our Federal income tax returns for fiscal 1998 through fiscal 2001. In the third quarter of fiscal 2005, we resolved all issues other than the
rollover impact of any potential resolution on the remaining fiscal 1997 issue and tax credits that were generated but not used in subsequent years that may be carried back. As a result of the
resolutions, $31.9 million previously recorded as a tax provision was reversed in fiscal 2005. We believe that we have provided sufficient tax provisions for these years and the ultimate
outcome of the IRS audits will not have a material adverse impact on our financial position or results of operations in future periods. However, we cannot predict with certainty how these matters will
be resolved and whether we will be required to make additional tax payments.

We
are a party to other litigation matters and claims, including those related to intellectual property, which we regard as normal in the course of our operations, and while the results
of such litigation matters and claims cannot be predicted with certainty, we believe that the final outcome of such matters will not have a material adverse impact on our financial position or results
of operations. However, because of the nature and inherent uncertainties of litigation, our business, financial condition, results of operations and cash flows could be materially and adversely
affected by the outcome of these actions.

Item 4.Submission of Matters to a Vote of Security Holders

Not applicable.

Item 4A.Executive Officers of the Registrant

The following sets forth certain information regarding our executive officers as of June 3, 2005:

Mr. D.
Scott Mercer (age 54) has served as our Interim Chief Executive Officer since May 2005. He has been a member of our Board of Directors since
November 2003. He served as Senior Vice President and Advisor to the CEO of Western Digital Corporation, a supplier of disk drives to the personal computer and consumer electronics industries,
from February 2004 to December 2004, and as Senior Vice President and Chief Financial Officer of that corporation from October 2001 to January 2004. From June 2000
to September 2001, Mr. Mercer served as Chief Financial Officer of Teralogic, Inc., a supplier of semiconductors and software to the digital television industry. From
June 1996 to May 2000, Mr. Mercer

27

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held
various senior operating and financial positions with Dell, Inc., a provider of products and services required for customers to build their information-technology and Internet
infrastructures. Mr. Mercer is also a director of Conexant Systems, Inc., NetRatings, Inc., and of a privately held company.

Mr. Subramanian
Sundaresh (age 49) has served as our President since May 2005 and briefly served as our Executive Vice President of marketing and product development
in May 2005. Prior to rejoining Adaptec, Mr. Sundaresh provided consulting services at various companies, including Adaptec, from December 2004 to April 2005. Between
July 2002 and December 2004, Mr. Sundaresh served as President and Chief Executive Officer of Candera, Inc., a supplier of storage SATA appliances. From July 1998 to
April 2002, Mr. Sundaresh served as President and Chief Executive Officer of Jetstream Communications, a provider in Voice over Broadband solutions. Mr. Sundaresh previously
worked at Adaptec from March 1993 to June 1998 as Vice President and General Manager for the Personal I/O business and Corporate Vice President of Worldwide Marketing.

Mr. Marshall
L. Mohr (age 49) has served as Vice President and Chief Financial Officer since July 2003. Prior to joining Adaptec, Mr. Mohr spent
22 years in various positions at PricewaterhouseCoopers including, most recently, 6 years as Managing Partner of PricewaterhouseCoopers' West Region Technology Industry Group.

Mr. Eric
Kelly (age 46) has served as our Vice President and General Manager of Worldwide Sales and Services since December. From August 2004 to December 2004
Mr. Kelly served as Vice President and General Manager of Corporate Marketing, Snap product marketing, Snap Engineering and Channel Sales. Prior to Snap Appliance, Inc. being acquired by
Adaptec, Mr. Kelly served as the Chief Executive Officer of Snap Appliance, Inc. from October 2002 to July 2004. From July 2001 to September 2002,
Mr. Kelly served as President of Maxtor Corporation's Network Systems Group, from July 2000 to July 2001, Mr. Kelly served as COO at iSyndicate Corp. and from
July 1998 to July 2000 served as Vice President of the Enterprise Group at Dell Computer Corporation.

Mr. Kok
Yong Lim (age 58) has served as our Vice President of Manufacturing since December 1999. From 1993 to 1999, Mr. Lim served as Managing Director and
Vice President of Adaptec Manufacturing Singapore.

28

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PART II

Item 5.Market for Registrant's Common Equity, Related Stockholder Matters and Issuer Purchases of Equity Securities

Market Information for Common Stock

Our common stock is traded on the Nasdaq National Market under the symbol "ADPT." The following table sets forth the high and low sales prices of our common stock
for the periods indicated as reported by the Nasdaq National Market. The market price of our common stock has been volatile. See "Risk Factors."

Fiscal 2005

Fiscal 2004High

Low

High

LowFirst quarter

$
9.53

$
7.15

$
8.74

$
5.95Second quarter


8.03


6.62


8.44


6.05Third quarter


8.50


7.28


9.50


7.40Fourth quarter


7.64


4.52


11.14


7.99


As
of June 3, 2005, there were approximately 725 stockholders of record of our common stock.

Dividends

We have not paid cash dividends on our common stock. It is presently our policy to reinvest earnings for our business.

29

---



Item 6.Selected Financial Data

The following selected financial information has been derived from the audited consolidated financial statements. The information set forth below is not
necessarily indicative of results of future operations and should be read in conjunction with "Management's Discussion and Analysis of Financial Condition and Results of Operations" and the audited
consolidated financial statements and related notes included elsewhere in this Annual Report on Form 10-K. We successfully completed the spin-off of our software
segment, Roxio, which is now known as Napster, into a fully independent and separate company in May 2001. The information below relates to our continuing operations.

|                                            |                                                       | Years Ended March 31,   |  
|------------------------------------------- | ----------------------------------------------------- | ----------------------- | -
|
|
|Consolidated Statements of Operations Data: |                                                       |                         |  
|                                            | Net revenues2                                         |                         | $
|                                            | Cost of revenues2                                     |                         |  
|                                            | Patent settlement fee                                 |                         |  
|                                            |                                                       |                         |  
|                                            | Gross profit                                          |                         |  
|                                            |                                                       |                         |  
|                                            | Total operating expenses1,2                           |                         |  
|                                            | Income (loss) from continuing operations              |                         |  
|                                            | Net income from discontinued operations               |                         |  
|                                            | Net loss on disposal of discontinued operations       |                         |  
|                                            | Net income (loss)                                     |                         |  
|Net Income (Loss) Per Share Data:           |                                                       |                         |  
|                                            | Basic:                                                |                         |  
|                                            |                                                       | Continuing operations   |  
|                                            |                                                       | Discontinued operations |  
|                                            |                                                       | Net income (loss)       |  
|                                            | Diluted:                                              |                         |  
|                                            |                                                       | Continuing operations   |  
|                                            |                                                       | Discontinued operations |  
|                                            |                                                       | Net income (loss)       |  
|                                            | Shares used in computing net income (loss) per share: |                         |  
|                                            |                                                       | Basic                   |  
|                                            |                                                       | Diluted                 |  

|                                  |                                                  | March 31,
|--------------------------------- | ------------------------------------------------ | ---------
|
|
|Consolidated Balance Sheets Data: |                                                  |          
|                                  | Cash, cash equivalents and marketable securities |          
|                                  | Restricted cash and marketable securities        |          
|                                  | Net assets of discontinued operations            |          
|                                  | Total assets2                                    |          
|                                  | Long-term liabilities                            |          
|                                  | Stockholders' equity2                            |          
|                                  | Working capital2                                 |          

---

Notes:

30

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Item 7.Management's Discussion and Analysis of Financial Condition and Results of Operations

This "Management's Discussion and Analysis of Financial Condition and Results of Operations" section should be read in conjunction with the other sections of this
Annual Report on Form 10-K, including "Item 1: Business"; "Item 6: Selected Financial Data"; and "Item 8: Financial Statements and Supplementary Data." This
section contains a number of forward-looking statements, including statements regarding our expectations of increased revenue and gross profit from our relationship with IBM, our expectation of
reduced operating expenses as a result of our strategic relationships with Vitesse and ServerEngines and the impact industry shortages of SCSI disk drive that are expected to have on our revenues in
fiscal 2006. These forward-looking statements are based on our current expectations and could be affected by the uncertainties and risk factors described throughout this filing and particularly in the
"Risk Factors" set forth in Part I, Item 1 of this Annual Report on Form 10-K. Our actual results may differ materially, and these forward-looking statements do not reflect
the potential impact of any mergers, acquisitions or other business combinations that had not been completed as of June 14, 2005.

Overview

In fiscal 2005, our revenues grew 5% as compared to fiscal 2004 primarily as a result of our fiscal 2005 acquisitions which increased revenue by
$46.2 million. This increase in revenue was offset by the industry shortage of SCSI disk drives, the transition from our Ultra 160 products to Ultra 320 products
and increased demand from OEM customers for our component products in which we have a lower market share, and lower average selling prices of OEM customers as compared with Channel customers. The
decline in gross margin in fiscal 2005 compared to fiscal 2004 was primarily due to changes in our product mix, negative margins associated with our new external storage products sold to IBM and, to a
lesser extent, changes in our customer mix between OEM and channel customers. Operating expenses increased in fiscal 2005 as compared to fiscal 2004, primarily as a result of additional costs related
to our acquisitions.

31

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We have continued in our efforts to grow and strengthen our business and expand our product offerings by streamlining our corporate organization, entering into strategic alliances and
making selective acquisitions.



32

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Our
growth and future revenue largely depends on the success of our external and networked storage products, new OEM design wins and, to a lesser extent, on our products addressing new
technologies (i.e., SAS, SATA and iSCSI). We continue to invest in research and development in our efforts to secure key customer design wins for both component level and external storage related
products. OEM design wins, channel acceptance of our products and overall profitability are key indicators management uses to evaluate the status of our business.

Results of Operations

The following table sets forth the items in the Consolidated Statements of Operations as a percentage of net revenues:

|                                          |                                                       | Years Ended March 31,    |   
|----------------------------------------- | ----------------------------------------------------- | ------------------------ | --
|
|Net revenues                              |                                                       | 100                      | % 
|Cost of revenues1                         |                                                       | 62                       |   
|                                          |                                                       |                          |   
|Gross margin                              |                                                       | 38                       |   
|                                          |                                                       |                          |   
|Operating expenses:                       |                                                       |                          |   
|                                          | Research and development1                             |                          | 24
|                                          | Selling, marketing and administrative1                |                          | 17
|                                          | Amortization of acquisition-related intangible assets |                          | 4 
|                                          | Write-off of acquired in-process technology           |                          | 1 
|                                          | Restructuring charges                                 |                          | 1 
|                                          | Goodwill impairment                                   |                          | 11
|                                          | Other charges (gains)                                 |                          | (0
|                                          |                                                       |                          |   
|                                          |                                                       | Total operating expenses |   
|                                          |                                                       |                          |   
|Loss from operations                      |                                                       | (20                      | ) 
|Interest and other income1                |                                                       | 2                        |   
|Interest expense                          |                                                       | (1                       | ) 
|                                          |                                                       |                          |   
|Income (loss) before income taxes         |                                                       | (19                      | ) 
|Provision for (benefit from) income taxes |                                                       | 11                       |   
|                                          |                                                       |                          |   
|Net income (loss)                         |                                                       | (30                      | )%
|                                          |                                                       |                          |   

---

Notes:

33

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Net Revenues.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)OEM

$
296.3

3
%
$
286.4

33
%
$
215.2Channel


140.3

14
%

123.1

(11
)%

138.8DSG


38.3

(12
)%

43.4

(20
)%

54.1Total Net Revenues

$
474.9

5
%
$
452.9

11
%
$
408.1


Fiscal 2005 compared to Fiscal 2004

Net revenues from our OEM segment increased by $9.9 million in fiscal 2005 as compared to fiscal 2004 reflecting increased sales of our component products,
which included $26.3 million due to the acquisition of the IBM i/p Series RAID business, as well as increased sales from products based on next generation SATA technology and external storage
systems. This was partially offset by a decline in sales volumes of our SCSI products primarily attributable to the industry shortage of SCSI disk drives in the fourth quarter of fiscal 2005, the
transition from our Ultra 160 products to Ultra 320 products in which we have a lower market share and change in sales mix of products incorporating our SCSI technology due to customers purchasing
more software and chip products which generally have lower average selling prices compared to HBAs or other board level SCSI products. We expect revenues in the first quarter of fiscal 2006 to be
impacted by the industry shortage of SCSI disk drives.

Net
revenues from our Channel segment increased by $17.2 million in fiscal 2005 as compared to fiscal 2004 reflecting $19.9 million due to the acquisition of Snap
Appliance, partially offset by a decrease in sales of our component products due lower demand from our Channel customers relative to our OEM customers.

Net
revenues from our DSG segment decreased by $5.1 million in fiscal 2005 as compared to fiscal 2004 as a result of the decline in sales volumes of our SCSI-based
desktop computer products and our digital media products, offset partially by increased sales of non-SCSI based connectivity and TV tuner products. We expect revenues from our
SCSI-based desktop
computer products to continue to decline as OEMs are incorporating connectivity technologies directly into their products.

Fiscal 2004 compared to Fiscal 2003

Net revenues from our OEM segment increased by $71.2 million in fiscal 2004 as compared to fiscal 2003 as a result of growth in sales of our systems
products, which are composed primarily of the products we acquired from Eurologic and an increase in sales of our component products. The increase in net revenues from our component products reflect
an increase in sales of ServeRAID products to IBM, which began in the second quarter of fiscal 2003, and RAID revenues from ICP vortex, which we acquired in the first quarter of fiscal 2004, partially
offset by the continued decline in sales volumes of our SCSI products due to a change in sales mix of products incorporating our SCSI technology due to customers purchasing more software and chip
products which generally have lower average selling prices compared to host bus adapters or other board level SCSI products. Additionally, we have faced intense competition in the transition from our
Ultra 160 products to our products employing Ultra 320 technology. Although this transition has been slower than we originally anticipated, it still negatively affected our revenues in fiscal 2004.

34

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Net
revenues from our Channel segment decreased by $15.7 million in fiscal 2004 as compared to fiscal 2003 as a result of a decline in sales volumes of our SCSI component
products. The decline in the volume of SCSI product sales was attributable to a decline in demand due to penetration of other lower-cost products, such as ATA, and a shift in the server
market share from smaller VARs to major OEMs. However, this decline was partially offset by an increase in sales of our RAID enabled products based on the next generation SATA technology
launched in the first quarter of fiscal 2004.

Net
revenues from the DSG segment decreased by $10.7 million in fiscal 2004 as compared to fiscal 2003 due to a decline in sales volumes of our SCSI-based desktop
computer products, FireWire/1394 products and USB 2.0 host-bus adapters, offset partially by increased sales of digital media products launched in the second quarter of fiscal 2003. The
decline in sales volume of our SCSI-based desktop computer products reflects a continued reduction in demand resulting from the penetration of other lower cost products and alternative
technologies for the desktop. The decline in sales volumes of our FireWire/1394 products and USB 2.0 host-bus adapters was caused by the continued trend of OEMs incorporating these
technologies into their products rather than end users purchasing our products as components at the retail level.

Geographical Revenues and Customer Concentration

Geographical Revenues:

FY 2005

FY 2004

FY 2003North America

41
%
41
%
47
%Europe

32
%
31
%
28
%Pacific Rim

27
%
28
%
25
%Total Gross Revenues

100
%
100
%
100
%


Our
international revenues remained relatively flat as a percent of our total gross revenues in fiscal 2005 as compared to fiscal 2004. Our international revenues grew as a percent of
our total gross revenues in fiscal 2004 as compared to fiscal 2003 reflecting our acquisition of ICP vortex located in Germany, favorable effects of the Euro relative to the dollar, generally strong
demand in the European market and increased sales to ODMs in the Pacific Rim region.

A
small number of our customers account for a substantial portion of our net revenues, and we expect that a limited number of customers will continue to represent a substantial portion
of our net revenues for the foreseeable future. In fiscal 2005, IBM and Dell accounted for 24% and 11% of our total net
revenues, respectively, and we expect IBM to represent an even larger percentage of our total net revenues in future periods as a result of our acquisition of the IBM i/p Series RAID business and our
supply agreement with IBM. In fiscal 2004, IBM and Dell accounted for 18% and 10% of our total net revenues, respectively. In fiscal 2003, Dell, IBM, Hewlett-Packard and Ingram Micro accounted for
14%, 13%, 11% and 10% of our total net revenues, respectively.

Gross Margin.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Gross Margin

$
181.2

(4
)%
$
188.7

(8
)%
$
204.9As a Percentage of Net Revenues


38
%



42
%



50
%


The
decline in gross margin in fiscal 2005 compared to fiscal 2004 was primarily due to changes in our product mix, negative margins associated with our new external storage products
sold to IBM and, to a lesser extent, changes in our customer mix between OEM and channel customers. Although both sales of our systems and components products increased from fiscal 2005 compared to
fiscal 2004, the overall

35

---



increase
in sales of our systems products was greater than the increase in sales of components products by $18.9 million. In addition, gross margins were generally lower for our systems
products as compared to our components products. Costs associated with our new external storage products sold to IBM were higher as a result of increased costs for initial components purchases from
suppliers, start-up production costs, high overhead costs associated with lower volumes and the cost of expediting components from suppliers and products to IBM. These costs impacted our
gross margin by $5.2 million compared to the margin we expected to obtain on these products. In addition, the decrease in gross margins was attributable to the shift of our revenue for
component products from channel to OEM customers. Our gross margins will be significantly impacted in the future by the mix of OEM and channel revenue, the mix of component and system revenue and our
ability to manage OEM external storage product costs. Our external storage products generally carry lower gross margin than our other products, and we expect revenues from these external storage
product lines to continue to increase relative to revenues from our other products.

The
decline in gross margin in fiscal 2004 compared to fiscal 2003 was primarily due to changes in our product mix reflecting the increase in sales of relatively lower margin products
including ServeRAID products to IBM and sales of external storage products resulting from our acquisition of Eurologic and, to a lesser extent, by the sales mix of our SCSI products where more lower
margin products were sold as compared to higher margin host bus adapters and board level SCSI products.

Research and Development Expense.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Research and Development

$
113.8

11
%
$
102.8

(13
)%
$
118.4


The
increase in research and development expense in fiscal 2005 as compared to fiscal 2004 was primarily a result of increased headcount from our acquisitions of Snap Appliance and the
IBM i/p Series RAID business, cost associated with the development of the IBM DS300 and DS400 products and compensation of $1.7 million in fiscal 2005 related to a management incentive program
established for former Snap Appliance employees pursuant to the Snap Appliance acquisition agreement. This was offset by decreased infrastructure spending and reduced headcount as a result of
restructuring programs implemented in fiscal years 2005 and 2004, the reduced headcount as a result of the Vitesse strategic alliance and decreased deferred compensation charges of $2.0 million
in fiscal 2005 compared to fiscal 2004. Deferred compensation charges represented the vesting of restricted stock, unvested cash and assumed stock options in connection with our Platys
Communications, Inc., or Platys, and Snap Appliance acquisitions.

The
decrease in research and development expense in fiscal 2004 as compared to fiscal 2003 was primarily a result of decreased spending and decreased deferred compensation charges
associated with our acquisition of Platys. The decrease in spending was primarily due to savings obtained through reductions in infrastructure spending and reduced headcount resulting from the
restructuring programs implemented in fiscal 2003 and savings obtained by transitioning certain research and development efforts to India. However, these savings were partially offset by additional
development expenses as a result of our acquisitions of Eurologic, ICP vortex and Elipsan. Deferred compensation charges, which represented the vesting of restricted stock, unvested cash and assumed
stock options, decreased by $6.4 million in fiscal 2004 as compared to fiscal 2003.

Our
investment in research and development primarily focuses on developing new products for external storage, storage software and server storage markets. We also invest in research and
development of new technologies, including iSCSI, SATA and SAS. A portion of our research and development expense fluctuates depending on the timing of major project costs such as prototype costs. As
a result of the

36

---



decrease
in headcount associated with the ServerEngines and Vitesse alliances, we expect to reduce annual research and development expenses by approximately $12.4 million.

Selling, Marketing and Administrative Expense.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Selling, Marketing and Administrative

$
82.4

5
%
$
78.4

(14
)%
$
90.8


The
increase in selling, marketing and administrative expense in fiscal 2005 as compared to fiscal 2004 was primarily a result of increased headcount from our acquisition of Snap
Appliance, compensation of $3.6 million in fiscal 2005 related to a management incentive program established for former Snap Appliance employees pursuant to the Snap Appliance acquisition
agreement and increased deferred
compensation charges of $0.7 million representing the vesting of assumed stock options in connection with our Platys and Snap Appliance acquisitions. This was partially offset by decreased
spending due to reductions of our workforce and infrastructure spending as a result of the restructuring plans implemented in fiscal years 2005 and 2004, and the integration and consolidation of
Eurologic's operations, which was completed in the fourth quarter of fiscal 2004.

The
decrease in selling, marketing and administrative expense in fiscal 2004 as compared to fiscal 2003 was primarily a result of decreased spending and decreased deferred compensation
charges associated with our acquisition of Platys. The decrease in spending was primarily due to reductions of our workforce and infrastructure spending as a result of the restructuring plans
implemented in fiscal 2003 and the first half of fiscal 2004. However, these savings were partially offset by the additional workforce brought on through our acquisitions of Eurologic, ICP vortex and
Elipsan. Deferred compensation charges, which represented the vesting of restricted stock, unvested cash and assumed stock options, decreased by $3.8 million in fiscal 2004 as compared to
fiscal 2003.

As
our selling, marketing and administrative expense consists primarily of salaries, including commissions, our expense may fluctuate based on changes to our revenue levels. We will
focus on controlling our selling, marketing and administrative spending in a way that allows our revenues to rise faster than our expenses.

Amortization of Acquisition-Related Intangible Assets.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Amortization of Acquisition-Related Intangible Assets

$
18.3

10
%
$
16.7

11
%
$
15.0


Acquisition-related
intangible assets include patents, core and existing technologies, covenants-not-to-compete, supply agreement, foundry agreement,
customer relationships, trade names, backlog and royalties. We amortize the acquisition-related intangible assets over periods which reflect the pattern in which the economic benefits of the assets
are expected to be realized, which is primarily using the straight-line method over their estimated useful lives, ranging from three months to seven years.

The
increase in amortization of acquisition-related intangible assets in fiscal 2005 compared to fiscal 2004 was due to the amortization of $9.7 million of purchased intangible
assets related to the acquisitions of Snap Appliance in July 2004, the IBM i/p Series RAID business in June 2004 and Elipsan Limited in February 2004. This was partially offset by
acquisition-related intangible assets that became fully amortized in December 2003 associated with our DPT acquisition and certain intangible assets associated with our Platys acquisition.

37

---



The
increase in amortization of acquisition-related intangible assets in fiscal 2004 as compared to fiscal 2003 related to the amortization of purchased intangible assets with the
acquisitions of Eurologic, ICP vortex and Elipsan of $4.3 million. This was partially offset by lower amortization related to our DPT acquisition of $2.6 million as it became fully
amortized in December 2003.

Write-Off of Acquired In-Process Technology.

FY 2005

FY 2004

FY 2003(in millions)IBM i/p Series RAID business

$
3.0

$


$
Snap Appliance


2.2





Eurologic





3.6


Elipsan





4.0


Platys








Total Write-Off of Acquired In-Process Technology

$
5.2

$
7.6

$



Projects
that qualify as acquired in-process technology represent those in which technological feasibility had not been established and no alternative future uses existed.
The amounts allocated to acquired in-process technology were determined through established valuation techniques in the high-technology computer industry.

The
net cash flows from the identified projects were based on estimates of revenues, cost of revenues, research and development expenses, including costs to complete the projects,
selling, marketing and administrative expenses, royalty expenses and income taxes from the projects. We believe the assumptions used in the valuations were reasonable at the time of the acquisitions.
The estimated net revenues and gross margins were based on management's projections of the projects and were in line with industry averages. Estimated total net revenues from the projects of Snap
Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan were expected to grow through fiscal 2009, fiscal 2009,
fiscal 2008 and fiscal 2007, respectively, and decline thereafter as other new products are expected to become available. Estimated operating expenses included research and development expenses and
selling, marketing and administrative expenses based upon historical and expected direct expense levels and general industry metrics. Estimated research and development expenses included costs to
bring the projects to technological feasibility and costs associated with activities undertaken to correct errors or keep products updated with current information (also referred to as "maintenance"
research and development) after a product is available for general release to customers. These activities range from 0% to 5% of net revenues for the in-process technologies.

The
effective tax rate used in the analysis of the in-process technologies reflects a combined historical industry specific average for the United States Federal and state
statutory income tax rates. The cost of capital reflects the estimated time to complete the projects and the level of risk involved. The following discount rates were used in computing the present
value of net cash flows from the acquired companies: approximately 24% for Snap Appliance, between 23% and 28% for the IBM i/p Series RAID business, approximately 27% for Eurologic and approximately
63% for Elipsan.

The
percentage of completion was determined using costs incurred by Snap Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan prior to their respective acquisition dates
compared to the estimated remaining research and development to be completed to bring the projects to technological feasibility. We estimated, as of the respective acquisition dates for Snap
Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan, that the projects were approximately 25% complete, 50% complete, 60% complete and 28% complete, respectively. All projects
outstanding as of the acquisition dates for Eurologic and Elipsan were completed as of March 31, 2004 and December 31, 2004, respectively. We expect remaining costs of approximately
$0.3 million and $12.3 million related to Snap

38

---



Appliance
and the IBM i/p Series RAID business, respectively, to bring the planned in-process projects to completion.

Restructuring Charges.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Restructuring Charges

$
5.9

37
%
$
4.3

(70
)%
$
14.3


During
fiscal years 2005, 2004 and 2003, we implemented several restructuring plans which included reductions of our workforce and consolidation of operations. The goal of these plans
was to bring our operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive new company-wide expense-control programs. All
expenses, including adjustments, associated with our restructuring plans are included in "Restructuring charges" in the Consolidated Statements of Operations and are not allocated to segments but
rather managed at the corporate level. For further discussion on our restructuring plans, please refer to Note 9 to the Notes to Consolidated Financial Statements.

Fiscal 2005 Restructuring Plans

Fourth Quarter of Fiscal 2005 Restructuring Plan:In the fourth quarter of fiscal 2005, we initiated certain actions to
consolidate primarily engineering resources in connection with the Vitesse strategic alliance and recorded a restructuring charge of $0.5 million. We do not expect to incur any further charges
in connection with this restructuring plan.

Third Quarter of Fiscal 2005 Restructuring Plan:In the third quarter of fiscal 2005, we initiated certain actions to
simplify our structure by streamlining the corporate organization and reducing operating costs. This resulted in a restructuring charge of $2.4 million, which related to the involuntary
termination of 46 employees in all functions of the organization and costs pertaining to estimated future obligations for non-cancelable lease payments for an excess facility in Germany.
In the fourth quarter of fiscal 2005, a provision adjustment of $0.1 million was made related to the third quarter of fiscal 2005 restructuring plan as severance and benefits were lower than
originally anticipated. We do not expect to incur any further charges in connection with this restructuring plan.

Second Quarter of Fiscal 2005 Restructuring Plan:In the second quarter of fiscal 2005, we initiated actions to consolidate
duplicative resources in connection with the acquisition of Snap Appliance, primarily in selling, marketing and administrative functions and recorded a restructuring charge of $0.7 million. We
do not expect to incur any further charges in connection with this restructuring plan. For the acquisition-related restructuring plan associated with the Snap Appliance acquisition, please see
Note 2 for further details.

First Quarter of Fiscal 2005 Restructuring Plan:In the first quarter of fiscal 2005, we initiated certain actions to
consolidate certain development and administrative functions in the United States and Europe, which were completed in the first half of fiscal 2005. We recorded a restructuring charge of
$0.8 million in the first quarter of fiscal 2005 related to the involuntary termination of employees and the costs pertaining to estimated future obligations for non-cancelable
lease payments for an excess facility in the United Kingdom. Additional charges of $1.4 million related to this plan associated with severance and benefits for employees primarily in the area
of research and development were taken in the second quarter of fiscal 2005. In the third quarter of fiscal 2005, a provision adjustment of $0.1 million was made related to the first quarter of
fiscal 2005 restructuring plan as severance and benefits were lower than originally anticipated. Restructuring charges related to the first quarter restructuring plan total $2.1 million. We do
not expect to incur any further charges in connection with this restructuring plan.

39

---



As a result of our fiscal 2005 restructuring plans, we expect to reduce our annual infrastructure spending by approximately $15 million, of which approximately 7%, 50% and 43%
will be reflected as a reduction in cost of revenues, research and development and selling, marketing and administrative expense, respectively.

Fiscal 2004 Restructuring Plans

In the fourth, third and second quarters of fiscal 2004, we implemented restructuring plans (collectively called the fiscal 2004 restructuring provision) to
consolidate primarily research and development resources, the involuntary termination of certain technical support, marketing and administrative personnel, the shutdown of our Hudson, Wisconsin
facility, and asset impairments associated with the identification of duplicative assets and facilities. As a result, we recorded a restructuring charge of $3.7 million, of which
$3.3 million related to severance and benefits of 30 employees. We recorded an adjustment to the fiscal 2004 restructuring provision of $0.2 million in fiscal 2005 as a reduction to
severance and benefits as actual results were lower than anticipated, offset by an adjustment of $0.6 million in fiscal 2004 related to the additional lease costs. As of March 31, 2005,
we have utilized approximately all of these charges and the plan is materially complete.

Fiscal 2003 Restructuring Plans

In the fourth and second quarters of fiscal 2003, we announced restructuring programs (collectively called the fiscal 2003 restructuring provision) to reduce
expenses and streamline operations and recorded a restructuring charge of $13.2 million. During fiscal years 2004 and 2003, we recorded adjustments to the fiscal 2003 restructuring provision of
$0.2 million and $0.1 million, respectively, related to the reduction to severance and benefits as actual results were lower than anticipated, offset by additional lease costs, primarily
related to the estimated loss of a facility in Florida through April 2008, the end of the lease term.

In
addition, we recorded charges of $0.5 million related to additional lease costs related to the estimated loss of a facility that we subleased in California through
April 2008, the end of the lease term. This related to our fiscal 2001 restructuring plan in response to the economic slowdown to reduce costs and improve operating efficiencies.

Goodwill Impairment.

Goodwill is not amortized, but instead is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be impaired. Impairment
of goodwill is tested at our reporting unit level which is at our segment level, by comparing each segment's carrying amount, including goodwill, to the fair value of that segment. To determine fair
value, our review process uses the income, or discounted cash flows, approach and the market approach. In performing our analysis, we use the best information available under the circumstances,
including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second step is
performed to measure the amount of impairment loss, if any. Based on our annual review of goodwill in the fourth quarter of fiscal 2005, we recorded an impairment charge of $52.3 million
related to our Channel segment. Factors that led to this conclusion included, but were not limited to, the negative impact of estimates of expected future income associated with increased costs
related to recent acquisitions and business alliances that occurred in fiscal 2005. These additional costs, along with industry technology transitions, place significant risk on our ability to achieve
and maintain profitability, and, therefore have adversely impacted our profitability forecasts. Our annual review of goodwill in the fourth quarter of fiscal 2004 and 2003 determined that there was no
impairment related to our goodwill.

40

---



Other Charges (Gains).

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Other Charges (Gains)

$
(0.3
)
(105
)%
$
6.0

291
%
$
1.5


Other
charges consisted of asset impairment charges related to certain properties classified as assets held for sale in fiscal 2004 and subsequently sold in fiscal 2005 and our minority
investments. Other charges also included charges associated with our strategic alliances with ServerEngines and Vitesse.

On
March 16, 2005, we entered into a strategic alliance with ServerEngines to develop and market next-generation IP storage products. Under the terms of the alliance,
ServerEngines employed 33 of our former engineering employees and licensed certain technology and acquired certain assets related to our iSCSI and TCP/IP offload protocol engines. On
January 26, 2005, we entered into a strategic alliance with Vitesse to develop and market next-generation SAS products. Under the terms of the alliance, Vitesse employed 44 of our
former engineering employees and licensed certain SAS technology and assets related to our development of SAS ROC products. As a result, we incurred charges in fiscal 2005 of $0.9 million and
$1.6 million for severance, benefits, loss on the sale of property and equipment and legal fees associated with the ServerEngines and Vitesse alliances, respectively.

In
fiscal 2004, we recorded an impairment charge of $5.0 million to reduce the carrying value of certain properties classified as assets held for sale to fair value less cost to
sell. We decided to consolidate our properties in Milpitas, California to better align our business needs with existing operations and to provide more efficient use of our facilities. As a result, two
owned buildings, including associated building improvements and property, plant and equipment, were classified as assets held for sale and were included in "Other current assets" in the Consolidated
Balance Sheets at March 31, 2004 at their expected fair value less expected cost to sell. In October 2004, we completed the sale of these properties that were previously classified as
held for sale. Net proceeds from the sale of the properties aggregated $9.6 million, which exceeded our estimated fair value of $6.8 million. As a result, a gain on the sale of the
properties of $2.8 million was recorded in fiscal 2005 as a credit to "Other charges (gains)" in the Consolidated Statements of Operations.

We
hold minority investments in non-public companies. We regularly monitor these minority investments for impairment and record reductions in the carrying values when
necessary. Circumstances that indicate an other-than-temporary decline include valuation ascribed to the issuing company in subsequent financing rounds, decreases in quoted
market price and declines in operations of the issuer. We recorded impairment charges of $1.0 million and $1.5 million in fiscal years 2004 and 2003, respectively, related to a decline
in the value of minority investments deemed to be other-than-temporary.

Interest and Other Income.

|                                                |  | FY 2005 |      | Percentage
Change |      | FY 2004 |   | Percentage
Change |   | FY 2003
|----------------------------------------------- |  | ------- | ---- | ----------------- | ---- | ------- | - | ----------------- | - | -------
|
|Interest income                                 |  | $       | 11.8 |                   | (39  | )%      | $ | 19.2              |   | (36    
|Gain on settlement with former president of DPT |  |         |     |                   | (100 | )%      |   | 49.3              |   | 100    
|Payment of license fee with NSE                 |  |         | (1.7 | )                 | 100  | %       |   |                  |   |       
|Gain (loss) on extinguishment of debt           |  |         |     |                   | (100 | )%      |   | (6.5              | ) | (296   
|Realized loss on repatriation                   |  |         | (4.5 | )                 | 100  | %       |   |                  |   |       
|Other                                           |  |         | 2.8  |                   | (39  | )%      |   | 4.4               |   | 549    
|                                                |  |         |      |                   |      |         |   |                   |   |        
|Total Interest and Other Income                 |  | $       | 8.4  |                   | (87  | )%      | $ | 66.4              |   | 96     
|                                                |  |         |      |                   |      |         |   |                   |   |        

41

---



Interest
and other income is primarily attributable to interest income earned on our cash, cash equivalents and marketable securities, gains or losses from the repurchase of our 3% Notes
and 43/4% Notes, fluctuations in foreign currency gains or losses, realized gains and losses on marketable securities and sublease income received from third parties.

The
decrease in interest and other income in fiscal 2005 as compared to fiscal 2004 was primarily due to: (1) a gain recorded in fiscal 2004 of $49.3 million in relation to
a settlement with the former president of DPT; (2) lower interest income earned on our cash, cash equivalents and marketable securities related to lower average cash balances;
(3) realized losses on our cash, cash equivalents and marketable securities, of which $4.5 million primarily resulted from the liquidation of investments held by our Singapore subsidiary
in connection with the repatriation of undistributed earnings to the U.S.; and (4) a one-time fully paid-up license fee of $1.7 million to NSE, which was recorded
in fiscal 2005, primarily for historical products that incorporated certain technology. This was partially offset by losses of $6.5 million on the repurchase of our 3% Notes and the redemption
of our 43/4% Notes in fiscal 2004 and a refund from the State Board of Equalization for prior qualifying sales and use tax payments of $0.7 million in fiscal 2005. For further
discussion on the settlement with the former president of DPT and NSE, please refer to Note 8 to the Notes to Consolidated Financial Statements.

The
increase in interest and other income in fiscal 2004 as compared to fiscal 2003 was primarily due to a gain of $49.3 million in relation to a settlement with the former
president of DPT and net realized gains of $2.0 million on foreign currency transactions. These gains were partially offset by lower interest income earned on our cash, cash equivalents and
marketable securities related to lower average cash balances and lower yields received on our investments and losses on the repurchase of our 3% Notes and the redemption of our 43/4%
Notes. In fiscal 2004, we recorded a loss of $5.7 million related to the repurchase of $214.8 million in principal amount of our 3% Notes and a loss of $0.8 million related to the
redemption of $82.4 million in principal amount of our 43/4% Notes. In fiscal 2003, we recorded a gain of $3.3 million related to the repurchase of $120.4 million
in principal amount of our 43/4% Notes.

Interest Expense.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Interest Expense

$
(4.4
)
(53
)%
$
(9.4
)
(43
)%
$
(16.4
)


Interest
expense is primarily associated with our 3/4% Notes, 3% Notes and 43/4% Notes, issued in December 2003, March 2002 and
February 1997, respectively. The decrease in interest expense for fiscal 2005 compared to fiscal 2004 was primarily due to the reduction in the outstanding balances of the 3% Notes and
43/4% Notes, partially offset by interest expense related to our 3/4% Notes. The decrease in interest expense for fiscal 2004 as compared to fiscal 2003 was primarily due
to the reduction in the outstanding balances of the 3% Notes, 43/4% Notes and the General Holdback due to Platys shareholders, partially offset by interest expense related to our
3/4% Notes. We expect future interest expense to decrease as we repurchased $18.8 million in principal amount of our 3% Notes subsequent to March 31, 2005.

Income Taxes.

FY 2005

Percentage
Change

FY 2004

Percentage
Change

FY 2003(in millions, except percentages)Provision For (Benefit From) Income Taxes

$
52.7

(260
)%
$
(33.0
)
1354
%
$
(2.3
)


For
fiscal 2005, we recorded an income tax provision of $52.7 million on a pre-tax loss of $92.4 million. Our fiscal 2005 effective income tax rate included an
increase in the valuation allowance for deferred tax assets of $67.9 million and tax on repatriation of $17.6 million offset by a net tax benefit of $26.4 million

42

---



from
discrete events relating to the method and amount of settled tax controversies. Our effective tax rate for fiscal 2005 also differs from the combined United States federal and state statutory
income tax rate of 40% primarily due to acquisition related charges for which no tax benefit is derived.

The
valuation allowance for deferred tax assets of $67.9 million was recorded at March 31, 2005 as we determined that it was more likely than not that our U.S. deferred tax
assets would not be realized. We continuously monitor the circumstances impacting the expected realization of our deferred tax assets on
a jurisdiction by jurisdiction basis. At March 31, 2005, our analysis of our deferred tax assets demonstrated that it was more likely than not that all of our U.S. deferred tax assets would not
be realized. Factors that led to this conclusion included, but were not limited to, our past operating results, cumulative tax losses in the U.S., and uncertain future income on a jurisdiction by
jurisdiction basis. The estimates of expected future income were negatively impacted by increased costs related to recent acquisitions and business alliances that occurred in fiscal 2005. These
additional costs, along with industry technology transitions, place significant risk on our ability to achieve and maintain profitability and therefore have adversely impacted the profitability
forecasts initially used to release the valuation allowance in fiscal 2004.

On
October 22, 2004, the American Jobs Creation Act of 2004, also referred to as the Act, was signed into law. The Act creates a temporary incentive for U.S. companies to
repatriate accumulated foreign earnings subject to certain limitations by providing a one-time deduction of 85% for certain dividends from controlled foreign corporations. In the fourth
quarter of fiscal 2005, we repatriated $360.6 million of undistributed earnings from Singapore to the United States, resulting in a tax liability of $17.6 million. The
one-time deduction is allowed to the extent that the repatriated amounts are used to fund a qualified Domestic Reinvestment Plan, as required by the Act. If we do not spend the repatriated
funds in accordance with our reinvestment plan, we may incur additional tax liabilities. We have not provided for U.S. deferred income taxes or foreign withholding taxes on the remaining undistributed
earnings of $255.6 million since these earnings are intended to be reinvested indefinitely. Although we do not have any current plans to repatriate the remaining undistributed earnings from our
Singapore subsidiary to our United States parent company, if we were to do so, additional income taxes at the combined United States Federal and state statutory rate of approximately 40% could be
incurred from the repatriation.

The
net tax benefit of $26.4 million for fiscal 2005 related to settled tax controversies, which includes discrete items totaling $31.9 million related to the amount and
methodology of resolving issues related to the IRS's audit of our federal income tax audits from fiscal 1998 through fiscal 2001, offset by changes in current pending IRS audits.

For
fiscal 2004, we recorded an income tax benefit of $33.0 million on a pre-tax income of $29.9 million. Our fiscal 2004 effective income tax rate included a
tax benefit for the reduction in the valuation allowance of $21.6 million and the reduction of previously accrued tax related liabilities of $6.3 million. The valuation allowance for
deferred tax assets was established in fiscal 2002 as we determined that it is more likely than not that the deferred tax assets would not be realized. We continuously monitor the circumstances
impacting the expected realization of our deferred tax assets and the tax provisions established for fiscal years under IRS audit. At March 31, 2004, our analysis of our deferred tax assets
demonstrated that it was more likely than not that all of our deferred tax assets would be realized. Factors that led to this conclusion included, but were not limited to, expected future income,
which included the completion of key products based on serial technologies, and increased revenue opportunities, particularly for our systems products, and our historical success in managing our
deferred tax assets. In addition, our acquisitions and business alliances, together with our streamlined operations and revised product roadmaps, were expected to be accretive in future periods.
Accordingly, we released the valuation allowance and additional tax provision in the fourth quarter of fiscal 2004, based on our conclusion that it was more likely than not that the deferred tax
assets existing at March 31, 2004 would be realized. Our effective tax rate for fiscal 2004 also differs from the combined United States federal and state statutory income tax rate of 40%
primarily due to the tax benefits from our Singapore tax holiday, research and development credits, and the tax benefit applicable to the DPT purchase price adjustment.

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For
fiscal 2003, we recorded an income tax benefit of $2.3 million on a pre-tax loss of $17.7 million. Our effective tax rate for fiscal 2003 generally differs
from the combined United States federal and state statutory income tax rate of 40% primarily due to the amortization of acquisition-related intangible assets that are not fully deductible for tax
purposes, changes in our valuation allowance, foreign earnings taxed at different rates and research and development credits.

Our
subsidiary in Singapore is currently operating under a tax holiday. We have agreed to terms for a new tax holiday package effective for fiscal years 2005 through 2010. The new tax
holiday will provide that profits derived from certain products will be exempt from tax, subject to certain conditions.

Our
tax-related liabilities were $57.5 million and $65.8 million at March 31, 2005 and 2004, respectively. Fluctuations in the tax related liability
account were a function of the current tax provisions, utilization of deferred tax assets and the timing of tax payments. Tax related liabilities are primarily composed of income, withholding and
transfer taxes accrued by us in the taxing jurisdictions in which we operate around the world, including, but not limited to, the United States, Singapore, Ireland, United Kingdom, Japan, and Germany.
The amount of the liability was based on management's evaluation of our tax exposures in light of the complicated nature of the business transactions we have entered into in a global business
environment.

Liquidity and Capital Resources

Key Components of Cash Flow

Cash used for operations was $10.3 million in fiscal 2005 compared to cash generated from operations of $95.4 million in fiscal 2004 and
$59.7 million in fiscal 2003. Cash used for operations for fiscal 2005 resulted primarily from our net loss. This was offset by the benefit of non-cash items included in operating
results which primarily consisted of our goodwill impairment of $52.3 million, decrease in our deferred tax assets of $50.7 million, depreciation and amortization of intangible assets
and property and equipment of $50.6 million, write-off of acquired in process technology of $5.2 million and amortization of deferred stock-based compensation of
$3.2 million. Additional factors included the non-cash effect on tax settlement of $26.0 million, gain on the sale of long-lived assets of $1.4 million and
changes to working capital assets and liabilities, excluding the impact of balances acquired from Snap Appliance and the IBM i/p Series RAID business, that decreased cash provided by operating
activities by $0.9 million.

Operating
cash for fiscal 2004 resulted primarily from our net income of $62.9 million, adjusted for non-cash items including depreciation and amortization of
intangible assets of $51.8 million, amortization of deferred stock-based compensation of $4.1 million, write-off of acquired in process technology of $7.6 million,
impairment loss recognized on assets held for sale of $5.0 million, write-off of minority investment of $1.0 million and loss of $6.5 million related to the repurchase
of our 3% Notes and 43/4% Notes offset by the non-cash portion of the gain on settlement with the former president of DPT of $18.3 million. These factors were
partially offset by changes to working capital assets and liabilities, excluding the impact of balances acquired from Eurologic, ICP vortex and Elipsan, that decreased cash provided by operating
activities by $1.9 million.

Days
sales outstanding increased to 57 at March 31, 2005 as compared to 41 at March 31, 2004, reflecting an increase in OEM revenue in which customers generally have longer
payment terms. The increase was not due to changes in the credit quality of our customers. Annualized inventory turns decreased to 5.2 at March 31, 2005 from 5.7 at March 31, 2004.
Overall inventory levels were higher at the end of fiscal 2005 compared to fiscal 2004 as we began manufacturing certain products that were previously outsourced to subcontractors and increased
inventory levels related to new systems products. Inventory management will continue to be an area of focus as we balance the need to maintain strategic inventory levels to ensure adequate supply and
competitive lead times with the risk of inventory obsolescence and customer requirements.

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Cash
provided by investing activities was $340.8 million in fiscal 2005 compared to cash used in investing activities of $22.9 million in fiscal 2004 and
$120.4 million in fiscal 2003. The cash provided by investing activities in fiscal 2005 was primarily related to sales and maturities of restricted marketable securities and marketable
securities, net of purchases, of $470.6 million. This was offset by our use of cash for the acquisitions of Snap Appliance and the IBM i/p Series RAID business of $124.0 million. The
cash used in investing activities in fiscal 2004 was primarily due to our acquisitions of Eurologic, ICP vortex and Elipsan, payment of holdback in connection with our acquisition of Platys, offset by
net sales and maturities of marketable securities.

Cash
provided by financing activities was $8.5 million in fiscal 2005 compared to cash used for financing activities of $110.2 million in fiscal 2004 and
$111.4 million in fiscal 2003. The cash provided by financing activities in fiscal 2005 was related to net proceeds received from our issuance of common stock in connection with purchases made
under our employee stock purchase plan and the exercise of stock options. The cash used in financing activities in fiscal 2004 was primarily driven by repurchases of our 43/4% and 3%
Notes offset by net proceeds from the issuance of new convertible debt as further described below.

Liquidity, Capital Resources and Financial Condition

At March 31, 2005, we had $526.6 million in cash, cash equivalents and marketable securities, of which approximately $50 million was held by
our Singapore subsidiary. In the fourth quarter of fiscal 2005, we repatriated $360.6 million of undistributed earnings from Singapore to the United States and incurred a tax liability of
$17.6 million. We have not provided for U.S. deferred income taxes or foreign withholding taxes on the remaining undistributed earnings since these earnings totaling approximately
$255.6 million are intended to be reinvested indefinitely. Although we do not have any current plans to repatriate the remaining undistributed earnings from our Singapore subsidiary to our
United States parent company, if we were to do so, additional income taxes at the combined United States Federal and state statutory rate of approximately 40% could be incurred from the repatriation.

In
December 2003, we issued $225.0 million of 3/4% Notes due December 22, 2023. The issuance costs associated with the 3/4% Notes
totaled $6.8 million and the net proceeds from the offering were $218.2 million. In conjunction with the issuance of the 3/4% Notes, we spent $64.1 million to enter
into a convertible bond hedge transaction. We also received $30.4 million from the issuance of warrants to purchase up to 19.2 million shares of our common stock. Please refer to
Note 6 for a detailed discussion of our debt and equity transactions. We utilized the proceeds from the issuance of 3/4% Notes to repurchase $214.8 million in aggregate
principal amount of the 3% Notes. Additionally, through the end of fiscal 2004, we redeemed the outstanding principal balance of $82.4 million of our 43/4% Notes. At
March 31, 2005, we had $260.2 million of aggregate principal amount in convertible notes that are due in March 2007 and December 2023 in the amount of $35.2 million
and $225.0 million, respectively. Subsequent to fiscal year-end, we repurchased $18.8 million of the 3% Notes on the open market for $18.6 million, resulting in a loss
on the early extinguishment of debt of $0.1 million (including unamortized debt issuance costs of $0.3 million). The loss on extinguishment of debt will be
included in "Interest and other income" in the Consolidated Statements of Operations in the first quarter of fiscal 2006.

We
are required to maintain restricted cash or investments to serve as collateral for the first six scheduled interest payments and the first ten scheduled interest payments on our 3%
Notes and 3/4% Notes, respectively. As of March 31, 2005, we had $6.4 million of restricted cash and restricted marketable securities, consisting of United States
government securities, of which $1.8 million was classified as short-term and $4.6 million was long-term.

We
expect capital expenditures to amount to between $8.0 million and $15.0 million during fiscal 2006, without taking into account any acquisitions.

The
IRS is currently auditing our income tax returns for fiscal 1997 and final settlement agreements have been filed with the United States Tax Court on all but one issue. In addition,
the IRS is auditing our

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Federal
income tax returns for fiscal 1998 through fiscal 2001. We have resolved all issues for fiscal 1998 through fiscal 2001 other than the rollover impact of any potential resolution on the
remaining fiscal 1997 issue and tax credits that were generated but not used in subsequent years that may be carried back. The fiscal 2000 and 2001 audit is ongoing. We believe that we have sufficient
tax provisions for these years. We believe the final outcome of the IRS audits will not have a material adverse impact on our liquidity.

We
believe that our cash balances and the cash flows generated by operations will be sufficient to satisfy our anticipated cash needs for working capital and capital expenditures for at
least the next 12 months. However, we may require additional cash to fund acquisitions or investment opportunities. In these instances, we may seek to raise such additional funds through public
or private equity or debt financings or from other sources. We may not be able to obtain adequate or favorable financing at that time. Any equity financing we obtain may dilute your ownership
interests and any debt financing could contain covenants that impose limitations on the conduct of our business.

The
following table summarizes our contractual obligations at March 31, 2005.

|                                                                  |  | Payments Due By Period
|----------------------------------------------------------------- |  | ----------------------
|
|Long-Term Debt and Associated Interest                            |  | $                     
|Operating Leases                                                  |  |                       
|Purchase Obligations1                                             |  |                       
|Other Long-Term Liabilities Reflected on Balance Sheet Under GAAP |  |                       
|                                                                  |  |                       
|Total                                                             |  | $                     
|                                                                  |  |                       

---

We
invest in technology companies through two venture capital funds, Pacven Walden Venture V Funds and APV Technology Partners II, L.P. At March 31, 2005, the carrying value of
such investments aggregated $3.3 million. We have also committed to provide additional funding of up to $0.5 million.

Off Balance-Sheet Arrangements

In conjunction with the 3/4% Notes offering in December 2003, we entered into a convertible bond hedge transaction with an affiliate of one
of the original purchasers of the 3/4% Notes. The convertible bond hedge is designed to mitigate stock dilution from conversion of the 3/4% Notes. The convertible bond
hedge has value if the average market price per share of our common stock upon exercise or expiration of the bond hedge is greater than $11.704 per share. Under the convertible bond hedge arrangement,
the counterparty agreed to sell to us up to 19.2 million shares of our common stock, which is the number of shares issuable upon conversion of the 3/4% Notes in full, at a price
of $11.704 per share. The convertible bond hedge transaction may be settled at our option either in cash or net shares and expires in December 2008. Settlement of the convertible bond hedge in
net shares on the expiration date would result in us receiving a number of shares of our common stock with a value equal to the amount otherwise receivable on cash settlement. Should there be an early
unwind of the convertible bond hedge transaction,

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the
amount of cash or net shares potentially received by us will depend upon then-existing overall market conditions, and on our stock price, the volatility of our stock and the amount of
time remaining on the convertible bond hedge.

CRITICAL ACCOUNTING POLICIES

The discussion and analysis of our financial condition and results of operations are based on the consolidated financial statements, which have been prepared in
accordance with accounting principles generally accepted in the United States. Note 1 of the Notes to Consolidated Financial Statements
describes the significant accounting policies essential to the consolidated financial statements. The preparation of these financial statements requires estimates and assumptions that affect the
reported amounts and disclosures. Although we believe that our judgments and estimates are appropriate and correct, actual future results may differ materially from our estimates.

We
believe the following to be our critical accounting policies because they are both important to the portrayal of our financial condition and results of operations and they require
critical management judgments and estimates about matters that are uncertain. If actual results or events differ materially from those contemplated by us in making these estimates, our reported
financial condition and results of operation for future periods could be materially affected. See "Risk Factors" for certain risks relating to our future operating results.

Revenue Recognition:We recognize revenue from the majority of our product sales, including sales to OEMs, distributors and
retailers, upon shipment from us, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable and collectibility is reasonably assured. Revenue from sales of our
external storage products, where software is essential to the functionality, is recognized when passage of title and risk of ownership is transferred to customers, persuasive evidence of an
arrangement exists, which is typically upon sale of product by our customer, the price is fixed or determinable and collectibility is reasonably assured.

Our
distributor arrangements provide distributors with certain product rotation rights. Additionally, we permit our distributors to return products subject to certain conditions. We
establish allowances for expected product returns in accordance with SFAS No. 48. We also establish allowances for rebate payments under certain marketing programs entered into with
distributors. These allowances comprise our revenue reserves and are recorded as direct reductions of revenue and accounts receivable. We make estimates of future returns and rebates based primarily
on our past experience as well as the volume of products in the distributor channel, trends in distributor inventory, economic trends that might impact customer demand for our products (including the
competitive environment), the economic value of the rebates being offered and other factors. In the past, actual returns and rebates have not been significantly different from our estimates. However,
actual returns and rebates in any future period could differ from our estimates, which could impact the net revenue we report.

Inventory:The valuation of inventory requires us to estimate obsolete or excess inventory as well as inventory that are not
of saleable quality. The determination of obsolete or excess inventory requires us to estimate the future demand for our products within specific time horizons, generally six to twelve months. To the
extent our demand forecast for specific products is less than our product on hand and our non-cancelable orders, we could be required to record additional inventory reserves, which would
have a negative impact on our gross margin. Additionally, if actual demand is higher than our demand forecast for specific products that have been fully reserved, our future margins may be higher.

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Goodwill:Goodwill is initially recorded when the purchase price paid for an acquisition exceeds the
estimated fair value of
the net identified tangible and intangible assets acquired. We perform an annual review on the last day of February of each year, or more frequently if indicators of potential impairment exist, to
determine if the recorded goodwill is impaired. Our impairment review process compares the fair value of our segments (which we have determined to be our reporting units) to their carrying value,
including the goodwill related to the segments. To determine the fair value, our review process uses the income, or discounted cash flows, approach and the market approach, which utilizes comparable
companies' data. The discounted future cash flow approach uses estimates including the following for each segment: revenue, based on assumed market growth rates and our assumed market share; estimated
costs; and appropriate discount rates based on the particular business's weighted average cost of capital. Our estimates of market segment growth, our market segment share and costs are based on
historical data, various internal estimates and certain external sources, and are based on assumptions that are consistent with the plans and estimates we are using to manage the underlying
businesses. Our business consists of both established and emerging technologies and our forecasts for emerging technologies are based upon internal estimates and external sources rather than
historical information. If future forecasts are revised, they may indicate or require future impairment charges. We also considered our market capitalization on the dates of our impairment tests under
SFAS 142, in determining the fair value of the respective businesses. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a second
step is performed to measure the amount of the impairment loss, if any. We performed our annual goodwill impairment test in the fourth quarter of fiscal 2005 and determined that goodwill was impaired.
As a result, we recorded an impairment charge of $52.3 million in fiscal 2005 related to our Channel segment.

The
discounted cash flow approach for estimating the fair value is dependent on a number of factors including estimates of future market growth, forecasted revenue and costs, expected
periods the assets will be utilized and appropriate discount rates used to calculate the discounted cash flow. Our fair value estimates, as well as the allocation of net assets to reporting units, are
based on assumptions we believe to be reasonable but which are unpredictable and inherently uncertain and as a result, actual results may differ from those estimates.

Income Taxes:We must make certain estimates and judgments in determining income tax expense for financial statement
purposes. These estimates and judgments occur in the calculation of certain tax assets and liabilities, which arise from differences in the timing of recognition of revenue and expense for tax and
financial statement purposes.

We
must assess the likelihood that we will be able to recover our deferred tax assets. We consider historical levels of income, expectations and risks associated with estimates of future
taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we must increase our provision for taxes by
recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As a result
of our analysis of expected future income at March 31, 2005, it was considered more likely than not that a valuation allowance for all U.S. deferred tax assets was required, resulting in a
$67.9 million tax provision. Should positive evidence cause the likelihood of the recoverability of the deferred tax assets to change in future periods, reversals of the valuation allowance
could have a significant impact on future results of operations. As a result of our analysis of expected future income at March 31, 2004, it was considered more likely than not that a valuation
allowance for deferred tax assets was not required, resulting in the release of previously recorded allowance generating a $21.6 million tax benefit.

In
addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize liabilities for anticipated tax
audit issues in the U.S. and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If we ultimately determine that
payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is

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no
longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be.
Tax related liabilities were released generating a net tax benefit of $26.4 million and $6.3 million in fiscal 2005 and fiscal 2004, respectively. For a discussion of current tax
matters, see Note 14 in the Notes to Consolidated Financial Statements.

Acquisitions and Other Major Transactions

We are continually exploring strategic acquisitions to build upon our existing library of intellectual property and enhance our technological leadership in the
markets where we operate.

Fiscal 2005

Acquisitions

During the second quarter of fiscal 2005, we purchased Snap Appliance. During the first quarter of fiscal 2005, we purchased the IBM i/p Series RAID business.
Accordingly, the estimated fair value of
assets acquired and liabilities assumed in the acquisitions and the results of operations of the acquired entities were included in our consolidated financial statements as of the respective effective
dates of the acquisitions. There were no significant differences between our accounting policies and those of the IBM i/p Series RAID business and Snap Appliance.

Snap Appliance:On July 23, 2004, we completed the acquisition of Snap Appliance, a provider of NAS products, to
expand our product offerings in the external storage market and to deliver cost-effective, scalable and easy-to-use DAS, NAS, Fibre Channel and IP-based
SAN products from the workgroup to the data center. The total purchase price was $84.4 million, consisting of $77.4 million in cash and transaction fees and $7.0 million related
to the fair value of assumed stock options to purchase 1.2 million shares of our common stock. The assumed stock options were valued using the Black-Scholes valuation model with the following
assumptions: volatility rate of 58%; a risk-free interest rate of 2.6%; and an estimated life of 2.25 years. Snap Appliance is included in our Channel segment (Note 17).

Of
the total assumed stock options, stock options to purchase approximately 0.7 million shares of our common stock, with exercise prices ranging between $1.42 and $5.66 per share,
were unvested, which we refer to as the Snap Unvested Options. The Snap Unvested Options have a ten-year term and vest primarily over four years from the date of grant. The intrinsic value
of the Snap Unvested Options of $3.6 million was accounted for as deferred stock-based compensation and is being recognized as compensation expense over the related vesting periods. In fiscal
2005, we recorded a reduction of $0.2 million of deferred stock-based compensation related to cancellations of Snap Unvested Options. In fiscal year 2005, the Consolidated Statement of
Operations included stock-based compensation expense with respect to Snap Unvested Options of $1.0 million.

In
addition, a management incentive program was established to pay former employees of Snap Appliance cash payments totaling $13.8 million, which is being paid, contingent upon
their employment with us, over a two-year period through the second quarter of fiscal 2007. Payments under the management incentive program will be expensed as employees meet their
employment obligations or are recorded as part of the Snap Appliance acquisition-related restructuring for involuntarily terminations by us. In fiscal 2005, the Consolidated Statements of Operations
included compensation expense related to the management incentive program of $5.7 million and an additional $1.4 million was originally accrued in the Snap Appliance acquisition-related
restructuring.

A
portion of the Snap Appliance acquisition price totaling $5.4 million was held back, and in connection with the management incentive program, $1.3 million will be held
back for a total of $6.7 million, also referred to as the Snap Appliance Holdback, for unknown liabilities that may have

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existed
as of the acquisition date. The Snap Appliance Holdback will be paid in the second quarter of fiscal 2006, except for funds necessary to provide for any pending claims.

Acquisition-Related Restructuring:In the third and fourth quarter of fiscal 2005, we refined our
plan to integrate the Snap Appliance operations related to integrating certain duplicative resources for both severance and benefits in connection with the involuntary termination of approximately 24
employees, exiting duplicative facilities and the disposal of duplicative assets. The acquisition-related restructuring liabilities were accounted for under EITF 95-3 and therefore were
included in the purchase price allocation of the cost to acquire Snap Appliance. We recorded a preliminary estimate of $6.0 million in the second quarter of fiscal 2005 for these activities. In
the third and fourth quarters of fiscal 2005, we recorded a $0.8 million increase to the accrued restructuring charges with a corresponding change to goodwill as our plans were further refined.
We expect to execute the integration plan as currently designed; however, actual results and costs may differ as the plan is executed. Any further changes to our estimate will result in an increase or
decrease to the accrued restructuring charges and a corresponding increase or decrease to goodwill. As of March 31, 2005, we utilized $3.7 million of these charges. We anticipate that
the remaining restructuring reserve balance of $3.1 million will be paid out by third quarter of fiscal 2012, primarily related to long-term facility leases.

IBM i/p Series RAID:On June 29, 2004, we completed the acquisition of IBM's i/p Series RAID component business line
consisting of certain purchased RAID data protection intellectual property, semiconductor designs and assets, and licensed from IBM related RAID intellectual property. The licensing agreement grants
us the right to use IBM's RAID technology and embedded Power PC technology for our internal and external RAID products to be sold to IBM and other customers. In conjunction with the acquisition, we
also entered into a three-year exclusive product supply agreement under which we will supply RAID software, firmware and hardware to IBM for use in IBM's iSeries and pSeries servers. We
also entered into an agreement for IBM to provide silicon wafer manufacturing processing services to us for the term of the supply agreement at agreed upon rates.

The
total purchase price is estimated at $49.5 million, which consists of a cash payment to IBM of $47.5 million, warrants valued at $1.1 million, net of
registration costs, and transaction costs of $0.9 million. In connection with the acquisition, we issued to IBM a warrant to purchase 250,000 shares of our common stock at an exercise price of
$8.13 per share. The warrant has a term of 5 years from the date of issuance and is immediately exercisable. The warrant was valued using the Black-Scholes valuation model using a volatility
rate of 62%, a risk-free interest rate of 3.9% and an estimated life of 5 years. The transaction costs consist primarily of legal, valuation and other fees. The IBM i/p Series RAID
business is included in our OEM segment (Note 17).

We
also entered into a service agreement, which was subsequently amended, for IBM to provide certain research and development services and to provide access to IBM's semiconductor design
tools. The semiconductor design tools license agreement is for two years at a total cost of $8.4 million and is payable in quarterly installments; however, the agreement can be cancelled by us
in any quarter, which termination would relieve any obligations for us to make future quarterly installment payments to IBM.

IBM Distribution Agreement

In December 2004, we entered into a distribution agreement with IBM for our RAID controllers and connectivity products sold for IBM's iSeries and pSeries
servers. The agreement was made through an amendment to our existing i/p Series RAID supply and intellectual property agreement entered into in June 2004 (See Note 2). The distribution
agreement is accounted for as a standalone transaction as it was not contemplated at the time we entered into the original IBM i/p Series RAID transaction.

Under
the amended intellectual property agreement, we are required to make fixed and royalty-based payments to IBM. The fixed payments potentially due under the arrangement total
$52.1 million, of which $25.0 million was paid in December 2004, the date we entered into the agreement, and the remainder is

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due
quarterly, in varied installments, through December 2008. A portion of the $52.1 million in total payments is contingent upon IBM purchasing certain levels of our products. Upon
entering into the agreement, we recorded the full remaining amount payable to IBM as a liability in the Consolidated Balance Sheets as we consider payment of the full amount to be probable. At
March 31, 2005, $11.6 million was recorded in "Accrued Liabilities" and $11.9 million was recorded in "Other Long-Term Liabilities" in the Consolidated Balance Sheets.

The
fixed consideration for the distribution agreement of $52.1 million was recorded as an asset to "Prepaid expenses" and "Other long-term assets" in the Consolidated
Balance Sheets and the amortization is included in "Net revenues" in the Consolidated Statements of Operations over a four-year period, reflecting the pattern in which the economic
benefits of the assets are expected to be realized. The royalty-based fee per unit is calculated using the average net sales price for units sold within the quarter and baseline royalty rates subject
to certain adjustment factors. The amortization of the fixed consideration and the royalty-based payments are recorded as a reduction to revenue in the period the units are sold.

Fiscal 2004

During the first quarter of fiscal 2004, we purchased Eurologic and ICP vortex. During the fourth quarter of fiscal 2004, we purchased Elipsan. Accordingly, the
estimated fair value of assets acquired and liabilities assumed in the acquisitions and the results of operations of the acquired entities were included in our consolidated financial statements as of
the respective effective dates of the acquisitions. There were no significant differences between our accounting policies and those of Eurologic, ICP vortex or Elipsan.

Eurologic:On April 2, 2003, we completed the acquisition of Eurologic, a provider of external and networked storage
products. We acquired Eurologic to further enhance our direct-attached and fibre-attached server storage capabilities by allowing us to provide end-to-end block- and
file-based networked storage products. As consideration for the acquisition of all of the outstanding capital stock of Eurologic, we paid $25.6 million in cash, subject to a
Holdback as described below, and assumed stock options to purchase 0.5 million shares of our common stock, with a fair value of $1.6 million. We also incurred $1.1 million in
transaction fees, including legal, valuation and accounting fees. The assumed stock options were valued using the Black-Scholes valuation model with the following assumptions: volatility rate ranging
from 57% to 81%; a risk-free interest rate ranging from 1.1% to 2.5%; and an estimated life ranging from 0.08 to 4 years. Eurologic's goodwill and amortizable intangible assets were
allocated based on the relative fair values of our OEM and Channel segments (Note 17).

Holdback:As part of the Eurologic purchase agreement, $3.8 million of the cash payment was
held back, also known as the Holdback, for unknown liabilities that may have existed as of the acquisition date. The Holdback, which was included as part of the purchase price, was included in
"Accrued liabilities" in the Consolidated Balance Sheet as of March 31, 2005 and was to be paid to the former Eurologic stockholders 18 months after the acquisition closing date, except
for funds necessary to provide for any pending claims. We paid $2.3 million of the Holdback as of March 31, 2005 and have asserted claims against the remaining amount for liabilities of
which we became aware following the consummation of the transaction. The former Eurologic stockholders have disputed these claims and have requested release of the remaining Holdback.

Earn-out Payments:We also agreed to pay the stockholders of Eurologic contingent
consideration of up to $10.0 million in cash if certain revenue levels were achieved by the acquired Eurologic business in the period from July 1, 2003 through June 30, 2004. The
milestone to achieve the contingent consideration was not attained as of June 30, 2004. As a result, no additional payments were made to former stockholders of Eurologic.

Acquisition-Related Restructuring:During the fourth quarter of fiscal 2004, we finalized our plans
to integrate the Eurologic operations. The integration plan included the involuntary termination or relocation

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of
approximately 110 employees, exiting duplicative facilities and the transition of all manufacturing operations from Dublin, Ireland to our manufacturing facility in Singapore. The consolidation of
the manufacturing operations as well as involuntary employee terminations was completed in the fourth quarter of fiscal 2004. The acquisition-related restructuring liabilities were accounted for under
EITF No. 95-3 and therefore were included in the purchase price allocation of the cost to acquire Eurologic. We recorded a liability of $3.3 million in fiscal 2004 for these
activities. As of December 31, 2004, we utilized approximately all of these charges and the plan is materially complete.

ICP vortex:On June 5, 2003, we completed the acquisition of ICP vortex. ICP vortex was a wholly-owned subsidiary of
Intel Corporation and provided a broad range of hardware and software RAID data protection products, including SCSI, SATA and fibre channel products. The final purchase price was $14.5 million
in cash, which included $0.3 million in transaction fees, consisting of legal, valuation and accounting fees. This purchase price included a final adjustment of $0.1 million in the first
quarter of fiscal 2005 to both goodwill and acquisitions costs. ICP vortex's goodwill and amortizable intangible assets were allocated based on the relative fair values of our OEM and Channel segments
(Note 17).

During
the first quarter of fiscal 2005, we finalized our plans to integrate the ICP vortex operations. The integration plan included the involuntary termination of 19 employees, the
transfer of manufacturing operations to Singapore and the integration of certain duplicative resources. The acquisition-related restructuring liabilities were accounted for under EITF 95-3
and therefore were included in the purchase price allocation of the cost to acquire ICP vortex. In fiscal 2004, we recorded a liability of $0.4 million for severance and benefits, of which
$0.3 million of these charges were utilized and $0.1 million was recorded as a reduction to the restructuring liability with a corresponding decrease to goodwill in the first quarter of
fiscal 2005.

Elipsan:On February 13, 2004, we completed the acquisition of Elipsan, a provider of networked storage infrastructure
software. Elipsan's storage virtualization technology will enable us to make storage more cost-effective, easier to scale, and to increase performance across multiple RAID subsystems. The
final purchase price was $19.4 million in cash, which included $0.7 million in transaction fees, consisting of legal, valuation and accounting fees. The purchase price included a final
adjustment of $0.8 million in fiscal 2005, primarily related to the reversal of the acquisition-related restructuring reserves of approximately $0.7 million. Elipsan's goodwill and
amortizable intangible assets were allocated based on the relative fair values of our OEM and Channel segments (Note 17).

Holdback:As part of the Elipsan purchase agreement, $2.0 million of the cash payment was held
back, also known as the Elipsan Holdback, for unknown liabilities that may have existed as of the acquisition date. The Elipsan Holdback, which was included as part of the purchase price, is included
in "Accrued liabilities" in the Consolidated Balance Sheet as of March 31, 2005 and will be paid to the former Elipsan stockholders 18 months after the acquisition closing date, except
for funds necessary to provide for any unknown liabilities.

Acquisition-Related Restructuring:During the fourth quarter of fiscal 2005, we finalized our plans
related to the integration of the Elipsan operations. The plan included the integration of certain duplicative resources, related to both severance and benefits in connection with the involuntary
termination or relocation of employees and, accordingly, recorded a $0.8 million reserve as of March 31, 2004. In fiscal 2005, we recorded an adjustment of $0.7 million as a
reduction to the liability with a corresponding decrease to goodwill as we intend to retain these employees. The acquisition-related restructuring liabilities were accounted for under EITF
95-3 and therefore were included in the purchase price allocation of the cost to acquire Elipsan. As of March 31, 2005, we made payments of approximately $25,000 under the plan. We
anticipate that the remaining restructuring reserve balance of approximately $45,000 will be paid out by the second quarter of fiscal 2006.

52

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Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R). This statement replaces SFAS No. 123, amends SFAS No. 95 and supersedes APB Opinion
No. 25. SFAS No. 123(R) requires companies to apply a fair-value based measurement method in accounting for share-based payment transactions with employees and to record
compensation expense for all stock awards granted and to awards modified, repurchased or cancelled after the required effective date. In addition, we are required to record compensation expense (as
previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In April 2005, the SEC approved that SFAS
No. 123(R) will be effective for annual periods, as opposed to interim periods as originally issued by the FASB, beginning after June 15, 2005. We are currently evaluating the impact of
adopting this statement; however, we expect that it will have a significant impact on our consolidated balance sheet and statement of operations. The impact on our consolidated financial statements
will be dependent on the transition method, the option-pricing model used to compute fair value and the inputs to that model such as volatility and expected life. The pro forma disclosures of the
impact of SFAS No. 123 provided in Note 1 may not be representative of the impact of adopting this statement.

In
March 2005, the SEC issued SAB 107, which offers guidance on SFAS No. 123(R). SAB 107 was issued to assist preparers by simplifying some of the implementation challenges
of SFAS No. 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be
required by preparers to successfully implement FAS No. 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude
differently on the fair value of employee stock options. Key topics covered by SAB 107 include valuation models, expected volatility and expected term. We will apply the principles of SAB 107 in
conjunction with our adoption of FAS No. 123(R).

In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an amendment of ARB No. 43, Chapter 4." This statement clarifies the accounting for
abnormal amounts of facility expense, freight, handling costs and wasted materials (spoilage) to require them to be recognized as
current-period charges. This statement is effective for inventory costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. The adoption of this
standard is not expected to have a material impact on our consolidated balance sheet or statement of operations.

At
its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarified the
meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. In September 2004, the FASB delayed the recognition
and measurement guidance to be applied to other-than-temporary impairment evaluations. The FASB expects to issue additional implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads.

Item 7A.Quantitative and Qualitative Disclosures About Market Risk

Interest Rate Risk

Our exposure to market risk for a change in interest rates relates primarily to our investment portfolio. As of March 31, 2005, our
available-for-sale debt investments, excluding those classified as cash equivalents, totaled $91.3 million (see Note 3 of the Notes to Consolidated Financial
Statements) and included corporate obligations, commercial paper, other debt securities, municipal bonds and United States government securities, all of which are of high investment grade. They are
subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31,
2005, the decline in the fair value of the portfolio would not be material to our financial position. Declines in interest rates will, over time, reduce our interest income.

53

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Equity Price Risk

We consider our direct exposure to equity price risk to be minimal. We invest in technology companies through two venture capital funds. As of March 31,
2005, the carrying value of such investments aggregated $3.3 million. We monitor our equity investments on a periodic basis. In the event that the carrying value of our equity investments
exceeds their fair value, and the decline in value is determined to be other-than-temporary, the carrying value is reduced to its current fair value.

Foreign Currency Risk

We translate foreign currencies into U.S dollars for reporting purposes; currency fluctuations can have an impact on our results. For all three years presented
there was an immaterial currency exchange impact from our intercompany transactions. In the past, we have entered into forward exchange contracts to hedge certain firm commitments denominated into
foreign currencies. Forward exchange contracts are denominated in the same currency as the underlying transaction and the terms of the forward foreign exchange contracts generally match the terms of
the underlying transactions. The amount of local currency obligations settled in any period is not significant to our cash flows or results of operations, although we continuously monitor the amount
and timing of those obligations. As there were no forward exchange contracts outstanding as of March 31, 2005 and 2004, the effect of an immediate 10% change in exchange rates on forward
exchange contracts would not have affected our financial position or results of operations.

Item 8.Financial Statements and Supplementary Data

See the index appearing under Item 15(a)(1) on page 57 of this Annual Report on Form 10-K for the Consolidated Financial Statements at
March 31, 2005 and 2004 and for each of the three years in the period ended March 31, 2005 and the Report of Independent Registered Public Accounting Firm.

Item 9.Changes in and Disagreements with Accountants on Accounting and Financial Disclosure

None.

Item 9A.Controls and Procedures

Evaluation of Disclosure Controls and Procedures

Under the supervision and with the participation of our management, including our Interim Chief Executive Officer (CEO) and our Chief Financial Officer (CFO), we
conducted an evaluation of our disclosure controls and procedures (as defined in Rules 13a-15(e) and 15d-15(e) under the Securities Exchange Act of 1934 (Exchange Act),
as of the end of the period covered by this Annual Report on Form 10-K. Based upon that evaluation, our Interim CEO and our CFO have concluded that the design and operation of our
disclosure controls and procedures were effective to ensure that information required to be disclosed by us in reports that we file or submit under the Exchange Act is recorded, processed, summarized
and reported within the time periods specified in Securities and Exchange Commission rules and forms.

Management's Report on Internal Control Over Financial Reporting

Our management is responsible for establishing and maintaining adequate internal control over financial reporting. Our internal control over financial reporting
was designed to provide reasonable assurance regarding the reliability of our financial reporting and the preparation of financial statements for external purposes in accordance with generally
accepted accounting principles. Internal control over financial reporting includes those policies and procedures that (i) pertain to the maintenance of records that in reasonable detail
accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that transactions are recorded as necessary to permit

54

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preparation
of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are being made only in accordance with authorizations
of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized acquisition, use or disposition of the company's
assets that could have a material effect on the financial statements.

Management
assessed the effectiveness of our internal control over financial reporting as of March 31, 2005, the end of our fiscal year. Management based its assessment on
criteria established inInternal ControlIntegrated Frameworkissued by the Committee of Sponsoring Organizations of the Treadway
Commission. Management's assessment included evaluation of such elements as the
design and operating effectiveness of financial reporting controls, process documentation, accounting policies, and our overall control environment. We reviewed the results of management's assessment
with the Audit Committee of our Board of Directors.

Based
on our assessment, management has concluded that our internal control over financial reporting was effective as of March 31, 2005.

Our
assessment of the effectiveness of our internal control over financial reporting as of March 31, 2005, has been audited by PricewaterhouseCoopers LLP, independent registered
public accounting firm, as stated in their report which is included herein.

Inherent Limitations on Effectiveness of Controls

Our management, including the Interim CEO and CFO, does not expect that our disclosure controls and procedures or our internal control over financial reporting
will prevent or detect all error and all fraud. A control system, no matter how well designed and operated, can provide only reasonable, not absolute, assurance that the control system's objectives
will be met. The design of a control system must reflect the fact that there are resource constraints, and the benefits of controls must be considered relative to their costs. Further, because of the
inherent limitations in all control systems, no evaluation of controls can provide absolute assurance that misstatements due to error or fraud will not occur or that all control issues and instances
of fraud, if any, within the company have been detected. These inherent limitations include the realities that judgments in decision-making can be faulty and that breakdowns can occur because of
simple error or mistake. Controls can also be circumvented by the individual acts of some persons, by collusion of two or more people, or by management override of the controls. The design of any
system of controls is based in part on certain assumptions about the likelihood of future events, and there can be no assurance that any design will succeed in achieving its stated goals under all
potential future conditions. Projections of any evaluation of controls effectiveness to future periods are subject to risks. Over time, controls may become inadequate because of changes in conditions
or deterioration in the degree of compliance with policies or procedures.

Item 9B.Other Information

None.

55

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PART III

Item 10.Directors and Executive Officers of the Registrant

Information with respect to our directors is incorporated by reference from the information under the caption: "Proposal No. 1Election of
Directors" in our definitive Proxy Statement for the Annual Meeting of Stockholders to be held on August 25, 2005, or the Proxy Statement. Information regarding the compliance by our directors,
executive officers and 10% or greater stockholders with Section 16(a) of the Exchange Act is incorporated by reference from the information under the caption: "Section 16(a) Beneficial
Ownership Reporting Compliance" from our Proxy Statement. Information with respect to our executive officers is included in Part I of this Annual Report on Form 10-K under
the heading "Executive Officers."

Adaptec
maintains a Code of Business Conduct, Ethics, and Compliance, which incorporates our code of ethics that is applicable to all employees, including all officers, and including our
independent directors who are not employees of Adaptec, with regard to their Adaptec-related activities. The Code of Business Conduct, Ethics, and Compliance incorporates our guidelines designed to
deter wrongdoing and to promote honest and ethical conduct and compliance with applicable laws and regulations. It also incorporates our expectations of our employees that enable us to provide
accurate and timely disclosure in our filings with the Securities and Exchange Commission and other public communications. In addition, it incorporates Adaptec guidelines pertaining to topics such as
health and safety compliance; diversity and non-discrimination; supplier expectations; and privacy.

The
full text of our Code of Business Conduct, Ethics, and Compliance is published on our Investor Relations web site at www.adaptec.com. We will post any amendments to the Code of
Business Conduct, Ethics, and Compliance, as well as any waivers that are required to be disclosed by the rules of either the SEC or The Nasdaq Stock Market, on our website.

Item 11.Executive Compensation

Information with respect to executive compensation is incorporated by reference from the information under the caption "Executive Compensation," "Compensation
Committee Interlocks and Insider Participation" and "Report on Executive Compensation" in our Proxy Statement.

Item 12.Security Ownership of Certain Beneficial Owners and Management and Related Stockholder Matters

Information with respect to the securities authorized for issuance under our equity compensation plans and the security ownership of our common stock by our
directors, executive officers and 5% stockholders is incorporated by reference from the information under the captions: "Executive CompensationEquity Compensation Plan Information" and
"Stock Ownership of Principal Stockholders and Management" in our Proxy Statement.

Item 13.Certain Relationships and Related Transactions

Information with respect to certain relationships of our directors, executive officers and 5% stockholders and related transactions is incorporated by reference
from the information under the caption: "Certain Relationships and Related Party Transactions" in our Proxy Statement.

Item 14.Principal Accountant Fees and Services

Information with respect to principal independent registered public accounting firm fees and services is incorporated by reference from the information under the
caption "Proposal No. 3Ratification of Appointment of Independent Registered Public Accounting Firm" and "Fees Paid to PricewaterhouseCoopers" in our Proxy Statement.

56

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PART IV

Item 15.Exhibits and Financial Statement Schedules

1.Index to Financial Statements:

The
following Consolidated Financial Statements and Report of Independent Registered Public Accounting Firm are contained in this Annual Report on Form 10-K:

|                                                                                                 |  | Page
|------------------------------------------------------------------------------------------------ |  | ----
|Consolidated Statements of OperationsFiscal Years Ended March 31, 2005, 2004 and 2003           |  | F-1 
|Consolidated Balance Sheets at March 31, 2005 and 2004                                           |  | F-2 
|Consolidated Statements of Cash FlowsFiscal Years Ended March 31, 2005 2004 and 2003            |  | F-3 
|Consolidated Statements of Stockholders' EquityFiscal Years Ended March 31, 2005, 2004 and 2003 |  | F-4 
|Notes to Consolidated Financial Statements                                                       |  | F-5 
|Report of Independent Registered Public Accounting Firm                                          |  | F-58

57

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2.Financial Statement Schedule:

SCHEDULE II  VALUATION AND QUALIFYING ACCOUNTS  FOR THE YEARS ENDED MARCH 31, 2005, 2004 AND 2003

|                          |                                  | Balance at
Beginning
of Period |   | Additions |  | Deductions |        | Balance at
End
of Period
|------------------------- | -------------------------------- | ------------------------------ | - | --------- |  | ---------- | ------ | ------------------------
|
|Year ended March 31, 2005 |                                  |                                |   |           |  |            |        |                         
|                          | Allowance for doubtful accounts1 |                                | $ | 1,269     |  | $          | 132    |                         
|                          | Sales returns1                   |                                |   | 3,960     |  |            | 15,535 |                         
|                          | Allowances1                      |                                |   | 4,727     |  |            | 23,362 |                         
|Year ended March 31, 2004 |                                  |                                |   |           |  |            |        |                         
|                          | Allowance for doubtful accounts1 |                                | $ | 1,298     |  | $          | 378    |                         
|                          | Sales returns1                   |                                |   | 3,904     |  |            | 13,112 |                         
|                          | Allowances1                      |                                |   | 3,930     |  |            | 12,286 |                         
|Year ended March 31, 2003 |                                  |                                |   |           |  |            |        |                         
|                          | Allowance for doubtful accounts1 |                                | $ | 1,114     |  | $          | 100    |                         
|                          | Sales returns1                   |                                |   | 5,174     |  |            | 14,788 |                         
|                          | Allowances1                      |                                |   | 2,216     |  |            | 12,180 |                         

---

Notes:

All
other schedules are omitted because they are not applicable or the amounts are immaterial or the required information is presented in the Consolidated Financial Statements and Notes thereto.

58

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3.Exhibits:

|     |  |                                                                                                                                                                     |  |      |  | Incorporated by Reference |  |     
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ------------------------- |  | ----
|
|
|2.01 |  | First Amended and Restated Master Separation and Distribution Agreement between the Registrant and Roxio, Inc., dated February 28, 2001.                            |  | 10-Q |  | 000-15071                 |  | 2.1 
|2.02 |  | General Assignment and Assumption Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                              |  | 10-Q |  | 000-15071                 |  | 2.2 
|2.03 |  | Indemnification and Insurance Matters Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                          |  | 10-Q |  | 000-15071                 |  | 2.3 
|2.04 |  | Master Patent Ownership and License Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                            |  | 10-Q |  | 000-15071                 |  | 2.4 
|2.05 |  | Master Technology Ownership and License Agreement between Registrant and Roxio, Inc., dated May 5, 2001.                                                            |  | 10-Q |  | 000-15071                 |  | 2.5 
|2.06 |  | Master Confidential Disclosure Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                 |  | 10-Q |  | 000-15071                 |  | 2.6 
|2.07 |  | Master Transitional Services Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                   |  | 10-Q |  | 000-15071                 |  | 2.7 
|2.08 |  | Employee Matters Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                               |  | 10-Q |  | 000-15071                 |  | 2.8 
|2.09 |  | Tax Sharing Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                                    |  | 10-Q |  | 000-15071                 |  | 2.9 
|2.10 |  | International Asset Transfer Agreement between Adaptec Mfg (S) Pte Ltd and Roxio Cl Ltd., dated May 5, 2001.                                                        |  | 10-Q |  | 000-15071                 |  | 2.12
|2.11 |  | Letter of Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                                      |  | 10-Q |  | 000-15071                 |  | 2.13
|2.12 |  | Agreement and Plan of Merger and Reorganization, dated July 2, 2001, by and among the Registrant, Pinehurst Acquisition Corporation and Platys Communications, Inc. |  | 8-K  |  | 000-15071                 |  | 2.1 
|3.01 |  | Certificate of Incorporation of Registrant filed with Delaware Secretary of State on November 19, 1997.                                                             |  | 10-K |  | 000-15071                 |  | 3.1 
|3.02 |  | Bylaws of Registrant, as amended on June 3, 2004.                                                                                                                   |  | 10-K |  | 000-15071                 |  | 3.02
|4.01 |  | Indenture, dated as of March 5, 2002, by and between the Registrant and Wells Fargo Bank, National Association.                                                     |  | S-3  |  | 333-89666                 |  | 4.04
|4.02 |  | Form of 3% Convertible Subordinated Note.                                                                                                                           |  | S-3  |  | 333-89666                 |  | 4.05
|     |  |                                                                                                                                                                     |  |      |  |                           |  |     

59

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|4.03  |   | Registration Rights Agreement, dated as of March 5, 2002, by and among the Registrant and Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Morgan
Stanley & Co. Incorporated. |  | S-3     |  | 333-89666  |  | 4.06      |  | 06/03/02 |  |  
|----- | - | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  | ---------- |  | --------- |  | -------- |  | -
|4.04  |   | Collateral Pledge and Security Agreement, dated as of March 5, 2002, by and among the Registrant, Wells Fargo Bank, National Association, as trustee and Wells Fargo Bank, National Association, as collateral agent.                         |  | S-3     |  | 333-89666  |  | 4.07      |  | 06/03/02 |  |  
|4.05  |   | Stock Purchase Warrant, dated March 24, 2002, issued to International Business Machines Corporation.                                                                                                                                          |  | S-3     |  | 333-86098  |  | 4.04      |  | 04/12/02 |  |  
|4.06  |   | Indenture, dated as of December 22, 2003, by and between the Registrant and Wells Fargo Bank, National Association.                                                                                                                           |  | 10-Q    |  | 000-15071  |  | 4.01      |  | 02/09/04 |  |  
|4.07  |   | Form of 3/4% Convertible Senior Subordinated Note.                                                                                                                                                                                            |  | 10-Q    |  | 000-15071  |  | 4.02      |  | 02/09/04 |  |  
|4.08  |   | Registration Rights Agreement, dated as of December 22, 2003, by and among the Registrant, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC.                                                         |  | 10-Q    |  | 000-15071  |  | 4.03      |  | 02/09/04 |  |  
|4.09  |   | Collateral Pledge and Security Agreement, dated as of December 22, 2003, by and among the Registrant, Wells Fargo Bank, National Association, as trustee, and Wells Fargo Bank, National Association, as collateral agent.                    |  | 10-Q    |  | 000-15071  |  | 4.04      |  | 02/09/04 |  |  
|4.10  |   | Warrant Agreement, dated as of June 29, 2004, between the Registrant and International Business Machines Corporation                                                                                                                          |  | S-3     |  | 333-119266 |  | 4.03      |  | 09/02/04 |  |  
|4.11  |   | Warrant Agreement, dated as of August 10, 2004, between the Registrant and International Business Machines Corporation                                                                                                                        |  | S-3     |  | 333-119266 |  | 4.04      |  | 09/02/04 |  |  
|4.12  |   | Third Amended and Restated Rights Agreement dated February 1, 2001 between the Registrant and Mellon Investor Services LLC, as Rights Agent                                                                                                   |  | 8-A/A   |  | 000-15071  |  | 4.1       |  | 03/20/01 |  |  
|10.01 |  | Registrant's Savings and Retirement Plan.                                                                                                                                                                                                     |  | 10-K    |  | 000-15071  |  | (A)       |  | (A)      |  |  
|10.02 |  | Second Amendment to the Registrant's Savings and Retirement Plan.                                                                                                                                                                             |  | 10-K    |  | 000-15071  |  | 10.02     |  | 06/14/04 |  |  
|10.03 |  | Third Amendment to the Registrant's Savings and Retirement Plan.                                                                                                                                                                              |  |         |  |            |  |           |  |          |  | X
|10.04 |  | Registrant's 1986 Employee Stock Purchase Plan (amended and restated June 1998, August 2000 and August 2003).                                                                                                                                 |  | 10-Q    |  | 000-15071  |  | 10.01     |  | 11/03/03 |  |  
|10.05 |  | 1990 Stock Plan, as amended.                                                                                                                                                                                                                  |  | SC TO-I |  | 005-38119  |  | 99.(d)(1) |  | 05/22/01 |  |  
|      |   |                                                                                                                                                                                                                                               |  |         |  |            |  |           |  |          |  |  

60

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|10.06 |   | Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended. |  | 10-K405 |  | 000-15071 |  | (B)       |  | (B)      |  | 
|----- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  | --------- |  | --------- |  | -------- |  | 
|10.07 |  | 1999 Stock Plan.                                                                                                                                                                                                                               |  | SC TO-I |  | 005-38119 |  | 99.(d)(2) |  | 05/22/01 |  | 
|10.08 |  | 2000 Nonstatutory Stock Option Plan and Form of Stock Option Agreement.                                                                                                                                                                        |  | SC TO-I |  | 005-38119 |  | 99.(d)(3) |  | 05/22/01 |  | 
|10.09 |  | 1990 Directors' Option Plan and forms of Stock Option Agreement, as amended.                                                                                                                                                                   |  | 10-K    |  | 000-15071 |  | 10.6      |  | 06/29/99 |  | 
|10.10 |  | 2000 Director Option Plan and Form of Agreement.                                                                                                                                                                                               |  | 10-Q    |  | 000-15071 |  | 10.1      |  | 11/06/00 |  | 
|10.11 | * | Option Agreement I between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995.                                                                                                        |  | 10-Q    |  | 000-15071 |  | 10.1      |  | 02/09/96 |  | 
|10.12 | * | Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995.                                                                                                       |  | 10-Q    |  | 000-15071 |  | 10.2      |  | 02/09/96 |  | 
|10.13 |   | Modification to Amendment to Option Agreement I & II between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing (S) Pte. Ltd.                                                                                              |  | 10-K    |  | 000-15071 |  | 10.17     |  | 06/29/99 |  | 
|10.14 | * | Amendment to Option Agreements I & II between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing (S) Pte. Ltd.                                                                                                             |  | 10-K    |  | 000-15071 |  | 10.16     |  | 06/29/99 |  | 
|10.15 | * | Amendment No. 3 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd.                                                                                                            |  | 10-K    |  | 000-15071 |  | 10.15     |  | 06/27/00 |  | 
|10.16 | * | Amendment No. 4 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd.                                                                                                            |  | 10-K    |  | 000-15071 |  | 10.15     |  | 06/26/01 |  | 
|10.17 | * | Amendment No. 5 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd.                                                                                                            |  | 10-Q    |  | 000-15071 |  | 10.01     |  | 02/11/02 |  | 
|10.18 |  | Form of Indemnification Agreement entered into between Registrant and its officers and directors.                                                                                                                                              |  | 10-K    |  | 000-15071 |  | 10.14     |  | 06/26/98 |  | 
|10.19 |   | Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor.                                                                                                                                          |  | 10-K    |  | 000-15071 |  | 10.16     |  | 06/28/95 |  | 
|      |   |                                                                                                                                                                                                                                                |  |         |  |           |  |           |  |          |  | 

61

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|10.20 |   | Amendment to the Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor.         |  | 10-K |  | 000-15071  |  | 10.20 |  | 06/14/04 |  |  
|----- | - | ------------------------------------------------------------------------------------------------------------------------------ |  | ---- |  | ---------- |  | ----- |  | -------- |  | -
|10.21 |   | License Agreement between International Business Machines Corporation and the Registrant.                                      |  | 10-K |  | 000-15071  |  | 10.14 |  | 06/27/00 |  |  
|10.22 |   | Amendment to License Agreement between International Business Machines Corporation and the Registrant.                         |  | 10-K |  | 000-15071  |  | 10.21 |  | 06/24/02 |  |  
|10.23 |   | Asset Purchase Agreement between International Business Machines Corporation and the Registrant.                               |  | 10-K |  | 000-15071  |  | 10.22 |  | 06/24/02 |  |  
|10.24 | * | Dell Supplier Master Purchase Agreement, dated as of September 27, 2002, by and between Dell Products L.P. and the Registrant. |  | 8-K  |  | 000-15071  |  | 99.1  |  | 01/24/03 |  |  
|10.25 |  | Registrant's Incentive Plan                                                                                                    |  | 10-Q |  | 000-15071  |  | 10.01 |  | 08/09/04 |  |  
|10.26 |  | Amended Registrant's Incentive Plan                                                                                            |  | 10-Q |  | 000-15071  |  | 10.01 |  | 02/07/05 |  |  
|10.27 |  | Ken Arola Termination Agreement                                                                                                |  | 10-Q |  | 000-15071  |  | 10.02 |  | 08/09/04 |  |  
|10.28 |   | Base Agreement, dated as of March 24, 2002, by and between the Registrant and International Business Machines Corporation      |  | 10-Q |  | 000-15071  |  | 10.03 |  | 08/09/04 |  |  
|10.29 |  | 2004 Equity Incentive Plan                                                                                                     |  | S-8  |  | 333-119271 |  | 4.03  |  | 09/24/04 |  |  
|10.30 |  | Form of Stock Option Agreement under the 2004 Equity Incentive Plan                                                            |  | 10-Q |  | 000-15071  |  | 10.02 |  | 11/10/04 |  |  
|10.31 |  | Form of Restricted Stock Purchase Agreement under the 2004 Equity Incentive Plan                                               |  | 10-Q |  | 000-15071  |  | 10.03 |  | 11/10/04 |  |  
|10.32 |  | Form of Restricted Stock Unit Agreement under the 2004 Equity Incentive Plan                                                   |  | 10-Q |  | 000-15071  |  | 10.04 |  | 11/10/04 |  |  
|10.33 |  | Registrant's Variable Incentive Plan                                                                                           |  | 10-Q |  | 000-15071  |  | 10.05 |  | 11/10/04 |  |  
|10.34 |  | Registrant's Deferred Compensation Plan (amended and restated July 2004)                                                       |  | 10-Q |  | 000-15071  |  | 10.06 |  | 11/10/04 |  |  
|10.35 |  | Eurologic Systems Group Limited 1998 Share Option Plan Rules (Amended as of 1 April 2003)                                      |  | S-8  |  | 333-104685 |  | 4.03  |  | 04/23/03 |  |  
|10.36 |  | Broadband Storage, Inc. 2001 Stock Option and Restricted Stock Purchase Plan                                                   |  | S-8  |  | 333-118090 |  | 4.03  |  | 08/10/04 |  |  
|10.37 |  | Snap Appliance, Inc. 2002 Stock Option and Restricted Stock Purchase Plan                                                      |  | S-8  |  | 333-118090 |  | 4.04  |  | 08/10/04 |  |  
|10.38 |  | Sundi Sundaresh offer letter, dated May 6, 2005                                                                                |  | 8-K  |  | 000-15071  |  | 10.01 |  | 05/26/05 |  |  
|10.39 |  | D. Scott Mercer offer letter                                                                                                   |  | 8-K  |  | 000-15071  |  | 10.01 |  | 06/06/05 |  |  
|10.40 |  | Sundi Sundaresh offer letter, dated June 1, 2005                                                                               |  | 8-K  |  | 000-15071  |  | 10.02 |  | 06/06/05 |  |  
|10.41 |  | Chairman of the Board Compensation Arrangement                                                                                 |  |      |  |            |  |       |  |          |  | X
|      |   |                                                                                                                                |  |      |  |            |  |       |  |          |  |  

62

---



|10.42 |  | Eric Kelly Employment and Non-Competition Agreement                                                                                     |  |     |  |           |  |      |  |          |  | X
|----- | - | --------------------------------------------------------------------------------------------------------------------------------------- |  | --- |  | --------- |  | ---- |  | -------- |  | -
|10.43 |  | Marshall Mohr offer letter                                                                                                              |  |     |  |           |  |      |  |          |  | X
|10.44 |  | Kok Yong Lim offer letter                                                                                                               |  |     |  |           |  |      |  |          |  | X
|10.45 |  | Stargate Solutions, Inc. 1999 Incentive Stock Plan                                                                                      |  | S-8 |  | 333-69116 |  | 4.03 |  | 09/07/01 |  |  
|10.46 |  | Distributed Processing Technology Corp. Omnibus Stock Option Plan                                                                       |  |     |  |           |  |      |  |          |  | X
|21.01 |   | Subsidiaries of Registrant.                                                                                                             |  |     |  |           |  |      |  |          |  | X
|23.01 |   | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.                                                   |  |     |  |           |  |      |  |          |  | X
|31.01 |   | Certification of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                             |  |     |  |           |  |      |  |          |  | X
|31.02 |   | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                     |  |     |  |           |  |      |  |          |  | X
|32.01 |   | Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |     |  |           |  |      |  |          |  | X

---

See
Item 15(a)(3), above.

See
Item 15(a)(2), above.

63

---





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.

|                    | ADAPTEC, INC.                                                    
|------------------- | -----------------------------------------------------------------
|Date: June 14, 2005 | /s/D. SCOTT MERCERD. Scott Mercer
Interim Chief Executive Officer

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

|Signature                                                   |  | Title                                                                                   |  | Date         
|----------------------------------------------------------- |  | --------------------------------------------------------------------------------------- |  | -------------
|                                                            |  |                                                                                         |  |              
|/s/D. SCOTT MERCERD. Scott Mercer                           |  | Interim Chief Executive Officer and Director (principal executive officer)              |  | June 14, 2005
|/s/MARSHALL L. MOHRMarshall L. Mohr                         |  | Vice President and Chief Financial Officer (principal financial and accounting officer) |  | June 14, 2005
|/s/CARL J. CONTICarl J. Conti                               |  | Chairman                                                                                |  | June 14, 2005
|/s/LUCIE J. FJELDSTADLucie J. Fjeldstad                     |  | Director                                                                                |  | June 14, 2005
|/s/JOSEPH S. KENNEDYJoseph S. Kennedy                       |  | Director                                                                                |  | June 14, 2005
|/s/ILENE H. LANGIlene H. Lang                               |  | Director                                                                                |  | June 14, 2005
|/s/ROBERT J. LOARIERobert J. Loarie                         |  | Director                                                                                |  | June 14, 2005
|/s/DR. DOUGLAS E. VAN HOUWELINGDr. Douglas E. Van Houweling |  | Director                                                                                |  | June 14, 2005

64

---



ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

|                                                      |                                                       | Years Ended March 31,    |         
|----------------------------------------------------- | ----------------------------------------------------- | ------------------------ | --------
|
|
|Net revenues                                          |                                                       | $                        | 474,990 
|Cost of revenues                                      |                                                       |                          | 293,746 
|                                                      |                                                       |                          |         
|                                                      | Gross profit                                          |                          |         
|                                                      |                                                       |                          |         
|Operating expenses:                                   |                                                       |                          |         
|                                                      | Research and development                              |                          |         
|                                                      | Selling, marketing and administrative                 |                          |         
|                                                      | Amortization of acquisition-related intangible assets |                          |         
|                                                      | Write-off of acquired in-process technology           |                          |         
|                                                      | Restructuring charges                                 |                          |         
|                                                      | Goodwill impairment                                   |                          |         
|                                                      | Other charges (gains)                                 |                          |         
|                                                      |                                                       |                          |         
|                                                      |                                                       | Total operating expenses |         
|                                                      |                                                       |                          |         
|Loss from operations                                  |                                                       |                          | (96,349 
|Interest and other income                             |                                                       |                          | 8,369   
|Interest expense                                      |                                                       |                          | (4,439  
|                                                      |                                                       |                          |         
|Income (loss) before income taxes                     |                                                       |                          | (92,419 
|Provision for (benefit from) income taxes             |                                                       |                          | 52,687  
|                                                      |                                                       |                          |         
|Net income (loss)                                     |                                                       | $                        | (145,106
|                                                      |                                                       |                          |         
|Net income (loss) per share:                          |                                                       |                          |         
|                                                      | Basic                                                 |                          | $       
|                                                      | Diluted                                               |                          | $       
|Shares used in computing net income (loss) per share: |                                                       |                          |         
|                                                      | Basic                                                 |                          |         
|                                                      | Diluted                                               |                          |         

See
accompanying Notes to the Consolidated Financial Statements.

F-1

---



ADAPTEC, INC.
CONSOLIDATED BALANCE SHEETS

|                                                       |                                                                                                  | March 31,                                                                                                     |        
|------------------------------------------------------ | ------------------------------------------------------------------------------------------------ | ------------------------------------------------------------------------------------------------------------- | -------
|
|
|Assets                                                 |                                                                                                  |                                                                                                               |        
|Current assets:                                        |                                                                                                  |                                                                                                               |        
|                                                       | Cash and cash equivalents                                                                        |                                                                                                               | $      
|                                                       | Marketable securities                                                                            |                                                                                                               |        
|                                                       | Restricted cash and marketable securities                                                        |                                                                                                               |        
|                                                       | Accounts receivable, net of allowance for doubtful accounts of $1,029 in 2005 and $1,269 in 2004 |                                                                                                               |        
|                                                       | Inventories                                                                                      |                                                                                                               |        
|                                                       | Deferred income taxes                                                                            |                                                                                                               |        
|                                                       | Prepaid expenses                                                                                 |                                                                                                               |        
|                                                       | Other current assets                                                                             |                                                                                                               |        
|                                                       |                                                                                                  |                                                                                                               |        
|                                                       |                                                                                                  | Total current assets                                                                                          |        
|Property and equipment, net                            |                                                                                                  |                                                                                                               | 56,180 
|Restricted marketable securities, less current portion |                                                                                                  |                                                                                                               | 4,615  
|Goodwill                                               |                                                                                                  |                                                                                                               | 91,486 
|Other intangible assets, net                           |                                                                                                  |                                                                                                               | 79,457 
|Other long-term assets                                 |                                                                                                  |                                                                                                               | 47,002 
|                                                       |                                                                                                  |                                                                                                               |        
|Total assets                                           |                                                                                                  | $                                                                                                             | 963,506
|                                                       |                                                                                                  |                                                                                                               |        
|Liabilities and Stockholders' Equity                   |                                                                                                  |                                                                                                               |        
|Current liabilities:                                   |                                                                                                  |                                                                                                               |        
|                                                       | Accounts payable                                                                                 |                                                                                                               | $      
|                                                       | Accrued liabilities                                                                              |                                                                                                               |        
|                                                       |                                                                                                  |                                                                                                               |        
|                                                       |                                                                                                  | Total current liabilities                                                                                     |        
|                                                       |                                                                                                  |                                                                                                               |        
|3/4% Convertible Senior Subordinated Notes             |                                                                                                  |                                                                                                               | 225,000
|3% Convertible Subordinated Notes                      |                                                                                                  |                                                                                                               | 35,190 
|Other long-term liabilities                            |                                                                                                  |                                                                                                               | 15,349 
|Commitments and contingencies (Note 15)                |                                                                                                  |                                                                                                               |        
|Stockholders' equity:                                  |                                                                                                  |                                                                                                               |        
|                                                       | Preferred stock; $0.001 par value                                                                |                                                                                                               |        
|                                                       |                                                                                                  | Authorized shares, 1,000; Series A shares, 250 designated; outstanding shares, none                           |        
|                                                       | Common stock; $0.001 par value                                                                   |                                                                                                               |        
|                                                       |                                                                                                  | Authorized shares, 400,000; outstanding shares, 112,339 as of March 31, 2005 and 109,810 as of March 31, 2004 |        
|                                                       | Additional paid-in capital                                                                       |                                                                                                               |        
|                                                       | Deferred stock-based compensation                                                                |                                                                                                               |        
|                                                       | Accumulated other comprehensive income, net of taxes                                             |                                                                                                               |        
|                                                       | Retained earnings                                                                                |                                                                                                               |        
|                                                       |                                                                                                  |                                                                                                               |        
|                                                       |                                                                                                  | Total stockholders' equity                                                                                    |        
|                                                       |                                                                                                  |                                                                                                               |        
|Total liabilities and stockholders' equity             |                                                                                                  | $                                                                                                             | 963,506
|                                                       |                                                                                                  |                                                                                                               |        

See
accompanying Notes to Consolidated Financial Statements.

F-2

---



ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF CASH FLOWS

|                                                                                                    |                                                                  | Years Ended March 31,                     |         
|--------------------------------------------------------------------------------------------------- | ---------------------------------------------------------------- | ----------------------------------------- | --------
|
|
|Cash Flows From Operating Activities:                                                               |                                                                  |                                           |         
|Net income (loss)                                                                                   |                                                                  | $                                         | (145,106
|Adjustments to reconcile net income (loss) to net cash provided by (used for) operating activities: |                                                                  |                                           |         
|                                                                                                    | Write-off of acquired in-process technology                      |                                           |         
|                                                                                                    | Non-cash charges associated with restructuring and other charges |                                           |         
|                                                                                                    | Stock-based compensation                                         |                                           |         
|                                                                                                    | Gain on the sale of long-lived assets                            |                                           |         
|                                                                                                    | Goodwill impairment                                              |                                           |         
|                                                                                                    | Non-cash effect of tax settlement                                |                                           |         
|                                                                                                    | Loss (gain) on extinguishment of debt                            |                                           |         
|                                                                                                    | Non-cash portion of DPT settlement gain                          |                                           |         
|                                                                                                    | Depreciation and amortization                                    |                                           |         
|                                                                                                    | Deferred income taxes                                            |                                           |         
|                                                                                                    | Income tax benefits (provision) of employees' stock transactions |                                           |         
|                                                                                                    | Other non-cash items                                             |                                           |         
|                                                                                                    | Changes in assets and liabilities (net of acquired businesses):  |                                           |         
|                                                                                                    |                                                                  | Accounts receivable                       |         
|                                                                                                    |                                                                  | Inventories                               |         
|                                                                                                    |                                                                  | Prepaid expenses and other current assets |         
|                                                                                                    |                                                                  | Other assets                              |         
|                                                                                                    |                                                                  | Accounts payable                          |         
|                                                                                                    |                                                                  | Other liabilities                         |         
|                                                                                                    |                                                                  |                                           |         
|Net Cash Provided by (Used for) Operating Activities                                                |                                                                  |                                           | (10,257 
|                                                                                                    |                                                                  |                                           |         
|Cash Flows From Investing Activities:                                                               |                                                                  |                                           |         
|Payment of general holdback in connection with acquisition of Platys                                |                                                                  |                                           |        
|Payment of holdback in connection with acquisition of Eurologic                                     |                                                                  |                                           | (2,279  
|Purchases of businesses, net of cash acquired                                                       |                                                                  |                                           | (123,978
|Purchases of restricted marketable securities                                                       |                                                                  |                                           |        
|Maturities of restricted marketable securities                                                      |                                                                  |                                           | 2,736   
|Purchases of property and equipment                                                                 |                                                                  |                                           | (14,354 
|Proceeds of sale of long-lived assets                                                               |                                                                  |                                           | 10,877  
|Purchases of other investments                                                                      |                                                                  |                                           |        
|Purchases of marketable securities                                                                  |                                                                  |                                           | (328,167
|Sales of marketable securities                                                                      |                                                                  |                                           | 718,009 
|Maturities of marketable securities                                                                 |                                                                  |                                           | 77,997  
|                                                                                                    |                                                                  |                                           |         
|Net Cash Provided by (Used for) Investing Activities                                                |                                                                  |                                           | 340,841 
|                                                                                                    |                                                                  |                                           |         
|Cash Flows From Financing Activities:                                                               |                                                                  |                                           |         
|Proceeds from the issuance of convertible notes, net of issuance costs                              |                                                                  |                                           |        
|Repurchases and redemption of convertible notes                                                     |                                                                  |                                           |        
|Purchase of convertible bond hedge                                                                  |                                                                  |                                           |        
|Proceeds from issuance of warrant                                                                   |                                                                  |                                           |        
|Proceeds from the issuance of common stock                                                          |                                                                  |                                           | 8,503   
|Installment payment on acquisition of software licenses                                             |                                                                  |                                           |        
|                                                                                                    |                                                                  |                                           |         
|Net Cash Provided by (Used for) Financing Activities                                                |                                                                  |                                           | 8,503   
|                                                                                                    |                                                                  |                                           |         
|Effect of foreign currency translation on cash and cash equivalents                                 |                                                                  |                                           | 38      
|                                                                                                    |                                                                  |                                           |         
|Net Increase (Decrease) in Cash and Cash Equivalents                                                |                                                                  |                                           | 339,125 
|Cash and Cash Equivalents at Beginning of Year                                                      |                                                                  |                                           | 102,463 
|                                                                                                    |                                                                  |                                           |         
|Cash and Cash Equivalents at End of Year                                                            |                                                                  | $                                         | 441,588 
|                                                                                                    |                                                                  |                                           |         

See accompanying Notes to Consolidated Financial Statements.

F-3

---



ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF STOCKHOLDERS' EQUITY

|                                                                    |                                                                 | Common Stock                             |   |   |     |   |   | Accumulated
Other
Comprehensive
Income |   |   |         |   |  
|------------------------------------------------------------------- | --------------------------------------------------------------- | ---------------------------------------- | - | - | --- | - | - | -------------------------------------- | - | - | ------- | - | -
|
|
|
|Balance, March 31, 2002                                             |                                                                 | 106,293                                  |   | $ | 106 |   | $ | 172,527                                |   | $ | (21,131 | ) | $
|Components of comprehensive income:                                 |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    | Net loss                                                        |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Unrealized gain on available-for-sale investments, net of taxes |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Foreign currency translation adjustment, net of taxes           |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 | Total comprehensive loss, net of taxes   |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Sale of common stock under employee stock purchase and option plans |                                                                 | 1,639                                    |   |   | 2   |   |   | 7,328                                  |   |   |        |   |  
|Income tax benefits of employees' stock transactions                |                                                                 |                                         |   |   |    |   |   | 1,142                                  |   |   |        |   |  
|Amortization of deferred stock-based compensation                   |                                                                 |                                         |   |   |    |   |   |                                       |   |   | 10,600  |   |  
|Adjustment of deferred stock-based compensation                     |                                                                 | (38                                      | ) |   |    |   |   | (2,417                                 | ) |   | 2,417   |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Balance, March 31, 2003                                             |                                                                 | 107,894                                  |   |   | 108 |   |   | 178,580                                |   |   | (8,114  | ) |  
|Components of comprehensive loss:                                   |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    | Net income                                                      |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Unrealized loss on available-for-sale investments, net of taxes |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Foreign currency translation adjustment, net of taxes           |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 | Total comprehensive income, net of taxes |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Sale of common stock under employee stock purchase and option plans |                                                                 | 1,926                                    |   |   | 2   |   |   | 7,520                                  |   |   |        |   |  
|Income tax benefits of employees' stock transactions                |                                                                 |                                         |   |   |    |   |   | 580                                    |   |   |        |   |  
|Issuance of common stock in connection with acquisitions            |                                                                 |                                         |   |   |    |   |   | 1,582                                  |   |   |        |   |  
|Amortization of deferred stock-based compensation                   |                                                                 |                                         |   |   |    |   |   |                                       |   |   | 4,078   |   |  
|Adjustment of deferred stock-based compensation                     |                                                                 | (10                                      | ) |   |    |   |   | (1,323                                 | ) |   | 1,323   |   |  
|Net cash paid for convertible bond hedge, warrant and related costs |                                                                 |                                         |   |   |    |   |   | (33,765                                | ) |   |        |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Balance, March 31, 2004                                             |                                                                 | 109,810                                  |   |   | 110 |   |   | 153,174                                |   |   | (2,713  | ) |  
|Components of comprehensive income:                                 |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    | Net loss                                                        |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Unrealized loss on available-for-sale investments, net of taxes |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    | Foreign currency translation adjustment, net of taxes           |                                          |  |   |     |  |   |                                        |  |   |         |  |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 | Total comprehensive loss, net of taxes   |   |   |     |   |   |                                        |   |   |         |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Sale of common stock under employee stock purchase and option plans |                                                                 | 2,514                                    |   |   | 1   |   |   | 8,502                                  |   |   |        |   |  
|Income tax provision of employees' stock transactions               |                                                                 |                                         |   |   |    |   |   | (616                                   | ) |   |        |   |  
|Issuance of restricted stock                                        |                                                                 | 15                                       |   |   | 1   |   |   | 117                                    |   |   | (118    | ) |  
|Issuance of common stock in connection with acquisition             |                                                                 |                                         |   |   |    |   |   | 3,464                                  |   |   |        |   |  
|Deferred stock-based compensation                                   |                                                                 |                                          |   |   |     |   |   | 3,598                                  |   |   | (3,598  | ) |  
|Amortization of deferred stock-based compensation                   |                                                                 |                                         |   |   |    |   |   | 75                                     |   |   | 3,450   |   |  
|Adjustment of deferred stock-based compensation                     |                                                                 |                                         |   |   |    |   |   | (563                                   | ) |   | 563     |   |  
|Issuance of warrant in connection with acquisition                  |                                                                 |                                         |   |   |    |   |   | 2,024                                  |   |   |        |   |  
|Non-cash tax settlement                                             |                                                                 |                                         |   |   |    |   |   | (4,068                                 | ) |   |        |   |  
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  
|Balance, March 31, 2005                                             |                                                                 | 112,339                                  |   | $ | 112 |   | $ | 165,707                                |   | $ | (2,416  | ) | $
|                                                                    |                                                                 |                                          |   |   |     |   |   |                                        |   |   |         |   |  

See accompanying Notes to the Consolidated Financial Statements.

F-4

---





ADAPTEC, INC.        NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting Policies

Description

Adaptec, Inc. ("Adaptec" or the "Company") designs, manufactures and markets storage products and software that are easy to manage and enable organizations
to move, manage and protect critical data and digital content. Our software and hardware products range from ASIC and RAID components to external storage arrays, and span SCSI, SAS, SATA, Fibre
Channel, and iSCSI technologies. Adaptec's broad range of chips, add-in cards and network storage arrays gives businesses a migration path from internal to external storage. Adaptec's
products use a common management tool to simplify storage administration and reduce related costs. Adaptec products are sold through OEMs and distribution channel customers to enterprises,
small and midsize businesses, government agencies, VARs, direct marketers, and retail users across geographically diverse markets.

Basis of Presentation

The consolidated financial statements include the accounts of Adaptec and all of its wholly-owned subsidiaries after elimination of intercompany transactions and
balances.

The
glossary of acronyms and accounting rules and regulations referred to within the Notes are listed in alphabetical order in Note 20.

Acquisitions

In fiscal 2005, the Company purchased International Business Machines Corporation's ("IBM") i/p Series RAID component business line (the "IBM i/p Series RAID"
business) and Snap Appliance, Inc. ("Snap Appliance"). In fiscal 2004, the Company purchased Eurologic Systems Group Limited ("Eurologic"), ICP vortex Computersysteme GmbH ("ICP vortex") and
Elipsan Limited ("Elipsan"). Accordingly, the estimated fair value of assets acquired and liabilities assumed in the acquisitions and the results of operations of the acquired entities were included
in the Company's consolidated financial statements as of the respective effective dates of the acquisitions. There were no significant differences between the Company's accounting policies and those
of the IBM i/p Series RAID business, Snap Appliance, Eurologic, ICP vortex or Elipsan. See Note 2 for further discussion of the Company's acquisition activities.

Use of Estimates and Reclassifications

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 amounts reported in the consolidated financial statements and accompanying notes. The Company relies on forward looking projections to estimate any potential
valuation allowances required related to net deferred tax assets, inventory reserves or impairments of long-lived assets. These estimates include, among other things, the amount and timing
of future revenues that are expected to come from products and services that have either recently been introduced or that are to be introduced in the future. It is reasonably possible that the actual
results could differ from such estimates resulting in valuation allowances of net deferred tax assets, inventory reserve charges, goodwill impairments or other charges.

Certain
reclassifications have been made to prior period reported amounts to conform to the current year presentation, including reclassification of auction rate securities from cash and
cash equivalents to marketable securities. Previously, such auction rate securities were classified as cash and cash equivalents.

F-5

---



Accordingly,
the Company has revised its presentation to exclude from cash and cash equivalents $16.7 million and $10.2 million of auction rate securities at March 31, 2004 and
2003, respectively, and to include such amounts as marketable securities. In addition, the Company has made corresponding adjustments to the accompanying statement of cash flows to reflect the gross
purchases and sales of these auction rate securities as investing activities. This adjustment resulted in a net decrease in cash used for investing activities by $6.5 million in fiscal 2004 and
a net increase in cash used for investing activities by $10.5 million in fiscal 2003. This reclassification had no impact on previously reported results of operations, operating cash flows or
working capital of the Company.

Foreign Currency Translation

For foreign subsidiaries whose functional currency is the local currency, the Company translates assets and liabilities to United States dollars using
period-end exchange rates, and translates revenues and expenses using average monthly exchange rates. The resulting cumulative translation adjustments are included in "Accumulated other
comprehensive income, net of taxes," a separate component of stockholders' equity in the Consolidated Balance Sheets.

For
foreign subsidiaries whose functional currency is the United States dollar, certain assets and liabilities are remeasured at the period-end or historical rates as
appropriate. Revenues and expenses are remeasured at the average monthly rates. Currency transaction gains and losses are recognized in current operations and have not been material to the Company's
operating results for the periods presented.

Derivative Financial Instruments

The Company did not enter into forward exchange or other derivative foreign currency contracts during the fiscal years ended March 31, 2005 and 2004. The
Company does not hold or issue foreign exchange contracts for trading or speculative purposes. In connection with the issuance of its 3/4% Convertible Senior Subordinated Notes
("3/4% Notes"), the Company entered into a derivative financial instrument to repurchase its common stock, at the Company's option, at specified prices in the future to mitigate
potential dilution as a result of the conversion of the 3/4% Notes. See Note 6 for further details.

Fair Value of Financial Instruments

For certain of the Company's financial instruments, including accounts receivable and accounts payable, the carrying amounts approximate fair market value due to
their short maturities. The following table represents the related cost basis and the estimated fair values, which are based on quoted market prices, for the Company's publicly traded debt:

|                                               |       | March 31, 2005 |         | March 31, 2004
|---------------------------------------------- | ----- | -------------- | ------- | --------------
|
|
|3/4% Notes                                     |       | $              | 225,000 |               
|3% Convertible Subordinated Notes ("3% Notes") |       |                | 35,190  |               
|                                               |       |                |         |               
|                                               | Total |                | $       | 260,190       
|                                               |       |                |         |               

F-6

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Cash Equivalents and Marketable Securities

Cash equivalents consist of highly liquid investments with original maturities of three months or less at the date of purchase. Marketable securities consist of
corporate obligations, commercial paper, other debt securities, municipal bonds and United States government securities with original maturities beyond three months. The Company's policy is to protect
the value of its investment portfolio and minimize principal risk by earning returns based on current interest rates. Marketable equity securities represent the Company's equity holding in a public
company.

Marketable
securities, including equity securities, are classified as available-for-sale and are reported at fair market value and unrealized gains and losses,
net of income taxes are included in "Accumulated other comprehensive income, net of taxes" as a separate component of stockholders' equity in the Consolidated Balance Sheets. The marketable securities
are adjusted for amortization of premiums and discounts and such amortization is included in "Interest and other income" in the Consolidated Statements of Operations. When the fair value of an
investment declines below its original cost, the Company considers all available evidence to evaluate whether the decline in value is other-than-temporary. Among other things,
the Company considers the duration and extent to which the market value has declined relative to its cost basis and economic factors influencing the markets. Unrealized losses considered
other-than-temporary are charged to "Interest and other income" in the Consolidated Statements of Operations in the period in which the determination is made. Gains and losses
on securities sold are determined based on the average cost method and are included in "Interest and other income" in the Consolidated Statements of Operations. The Company does not hold its
securities for trading or speculative purposes.

Restricted
marketable securities consist of United States government securities that are required as security under both the 3% Notes Indenture and the 3/4% Notes
Indenture (Note 6).

Concentration of Risk

Financial instruments that potentially subject the Company to significant concentrations of credit risk consist principally of cash, cash equivalents, marketable
securities and trade accounts receivable. The Company invests in high-credit quality investments, maintained with major financial institutions. The Company, by policy, limits the amount of
credit exposure through diversification and management regularly monitors the composition of its investment portfolio for compliance with the Company's investment policies.

The
Company sells its products to OEMs, distributors and retailers throughout the world. Sales to customers are predominantly denominated in United States dollars and, as a result, the
Company believes its foreign currency risk is minimal. In the fourth quarter of fiscal 2003, the Company began
Euro-denominated sales to its customers in the European Union and expects to continue such sales in the future. The Company performs ongoing credit evaluations of its customers' financial
condition and generally does not require collateral from its customers. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable. Two
customers accounted for 14% and 11% of gross accounts receivable at March 31, 2005 and one customer accounted for 12% of gross accounts receivable at March 31, 2004.

The
Company currently purchases finished production silicon wafers used in its products from Taiwan Semiconductor Manufacturing Co., Ltd. ("TSMC") and IBM and if TSMC or IBM fail
to meet the

F-7

---



Company's
manufacturing needs, it would delay production and product shipments to the Company's customers.

The
Company's industry is characterized by rapid technological change, competitive pricing pressures and cyclical market patterns. The Company's financial results are affected by a wide
variety of factors, including general economic conditions worldwide, economic conditions specific to its industry, the timely implementation of new manufacturing technologies and the ability to
safeguard patents and intellectual property in a rapidly evolving market. In addition, the market for its products has historically been cyclical and subject to significant economic downturns at
various times. As a result, the Company may experience significant period-to-period fluctuations in future operating results due to the factors mentioned above or other
factors. The Company believes that its existing sources of liquidity, including its cash, cash equivalents and investments, will be adequate to support its operating and capital investment activities
for the next twelve months.

Inventories

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis.

Property and Equipment

Property and equipment are stated at cost and depreciated or amortized using the straight-line method over the estimated useful lives of the assets.
The Company capitalizes substantially all costs related to the purchase and implementation of software projects used for internal business operations. Capitalized internal-use software
costs primarily include
license fees, consulting fees and any associated direct labor costs and are amortized over the estimated useful life of the asset, typically a three to five-year period.

Goodwill and Other Intangible Assets

Goodwill represents the excess of the purchase price paid over the fair value of tangible and identifiable intangible net assets acquired in business
combinations. Other intangible assets, net, consist of acquisition-related intangible assets, intellectual property and warrants. Other intangible assets, net, are carried at cost less accumulated
amortization. Amortization of goodwill was ceased effective April 1, 2002. Goodwill is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be
impaired. Other intangible assets are amortized over their estimated useful lives ranging from three months to seven years, reflecting the pattern in which the economic benefits of the assets are
expected to be realized.

Other Long-Term Assets

The Company's other long-term assets primarily include a distribution agreement (Note 13), debt issuance costs (Note 6) and minority
investments (Note 10).

Impairment of Long-Lived Assets

In accordance with SFAS No. 144, the Company regularly performs reviews to determine if facts or circumstances are present, either internal or external,
which would indicate if the carrying values of its long-lived assets are impaired. When the Company determines that the carrying value of its long-lived assets, other than
goodwill, may not be recoverable based upon the existence of one or more indicators of

F-8

---



impairment,
the Company measures any impairment based on a discounted estimated future cash flows method and applying a discount rate commensurate with the risks inherent in its current business
model. The impairment of long-lived assets is included in "Other charges (gains)" in the Consolidated Statements of Operations. In fiscal 2004, the Company recorded a $5.0 million
charge for impairment of properties classified as assets held for sale as the carrying amount exceeded its estimated fair value less cost to sell (Note 10). In fiscal 2005, the Company recorded
a gain on the sale of these properties of $2.8 million and was credited to "Other charges" in the Consolidated Statements of Operations as these properties.

Stock-Based Compensation

The Company has employee and director stock compensation plans which are more fully described in Note 12. The Company accounts for stock-based compensation
in accordance with APB Opinion No. 25 as interpreted by FIN 44, and complies with the disclosure provisions of SFAS No. 148, an amendment of SFAS No. 123. Under APB Opinion
No. 25, compensation expense is recognized on the measurement date based on the excess, if any, of the fair value of the Company's common stock over the amount an employee must pay to acquire
the common stock.

The
Company accounts for equity instruments issued to non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, which
requires that such equity instruments be recorded at their fair value on the measurement date, which is typically the date of grant.

The
following table illustrates the effect on net income (loss) and net income (loss) per share if the Company had applied the fair value recognition provisions of SFAS No. 123 to
employee and director stock option plans, including shares issued under the Company's ESPP, collectively called "options," for all periods presented:

|                                                                                                        |  | Years Ended March 31, |         
|------------------------------------------------------------------------------------------------------- |  | --------------------- | --------
|
|
|Net income (loss), as reported                                                                          |  | $                     | (145,106
|Add: Deferred stock-based compensation expense included in reported net income (loss)                   |  |                       | 3,191   
|Deduct: Total stock-based compensation expense determined under the fair value-based method, net of tax |  |                       | (26,853 
|                                                                                                        |  |                       |         
|Pro forma net income (loss)                                                                             |  | $                     | (168,768
|                                                                                                        |  |                       |         
|Basic net income (loss) per share:                                                                      |  |                       |         
|As reported                                                                                             |  | $                     | (1.31   
|Pro forma                                                                                               |  | $                     | (1.52   
|Diluted net income (loss) per share:                                                                    |  |                       |         
|As reported                                                                                             |  | $                     | (1.31   
|Pro forma                                                                                               |  | $                     | (1.52   

See
Note 12 for a discussion of the assumptions used in the Black-Scholes option pricing model and estimated fair value of options.

F-9

---



Revenue Recognition

The Company recognizes revenue from the majority of its product sales, including sales to OEMs, distributors and retailers, upon shipment from the Company,
provided that persuasive evidence of an arrangement exists, the price is fixed or determinable and collectibility is reasonably assured. Revenue from sales of its external storage products, where
software is essential to the functionality, is recognized when passage of title and risk of ownership is transferred to customers, persuasive evidence of an arrangement exists, which is typically upon
sale of product by the customer, the price is fixed or determinable and collectibility is reasonably assured.

The
Company's distributor arrangements provide distributors with certain product rotation rights. Additionally, the Company permits distributors to return products subject to certain
conditions. The Company establishes allowances for expected product returns in accordance with SFAS No. 48. The Company also establishes allowances for rebate payments under certain marketing
programs entered into with distributors. These allowances comprise the Company's revenue reserves and are recorded as direct reductions of revenue and accounts receivable. The Company makes estimates
of future returns and rebates based primarily on its past experience as well as the volume of products in the distributor channel, trends in distributor inventory, economic trends that might impact
customer demand for its products (including the competitive environment), the economic value of the rebates being offered and other factors. In the past, actual returns and rebates have not been
significantly different from the Company's estimates. However, actual returns and rebates in any future period could differ from the Company's estimates, which could impact the net revenue it reports.

For
products which contain software, where software is essential to the functionality of the product, or software product sales, the Company recognizes revenue in accordance with SOP
No. 97-2, as amended and modified by SOP 98-9. For software sales that are considered multiple element transactions, the entire fee from the arrangement is allocated to
each respective element based on its vendor specific fair value or upon the residual method and recognized when revenue recognition criteria for each element are met. Vendor specific fair value for
each element is established based on the sales price charged when the same element is sold separately or based upon a renewal rate. For multiple element sales involving software to distributors,
revenue is recognized when the distributor sells the goods or services to the end-user or OEM.

Software Development Costs

The Company's policy is to capitalize software development costs incurred after technological feasibility has been demonstrated, which is determined to be the
time a working model has been completed. Through March 31, 2005, costs incurred subsequent to the establishment of technological feasibility have not been significant and all software
development costs have been charged to "Research and development" in the Consolidated Statements of Operations.

Income Taxes

The Company accounts for income taxes using an asset and liability approach, which requires recognition of deferred tax assets and liabilities for the expected
future tax consequences of events that have been recognized in the Company's consolidated financial statements, but have not been reflected in the Company's taxable income. A valuation allowance is
established to reduce deferred tax assets to their estimated realizable value. Therefore, the Company provides a valuation allowance to the extent that the Company does not believe it is more likely
than not that it will generate sufficient taxable income in future

F-10

---



periods
to realize the benefit of its deferred tax assets. Predicting future taxable income is difficult, and requires the use of significant judgment.

Recent Accounting Pronouncements

In December 2004, the FASB issued SFAS No. 123(R). This statement replaces SFAS No. 123, amends SFAS No. 95 and supersedes APB Opinion
No. 25. SFAS No. 123(R) requires companies to apply a fair-value based measurement method in accounting for share-based payment transactions with employees and to record
compensation expense for all stock awards granted and to awards modified, repurchased or cancelled after the required effective date. In addition, the Company is required to record compensation
expense (as previous awards continue to vest) for the unvested portion of previously granted awards that remain outstanding at the date of adoption. In April 2005, the SEC approved that SFAS
No. 123(R) will be effective for annual periods, as opposed to interim periods as originally issued by the FASB, beginning after June 15, 2005. The Company is currently evaluating the
impact of adopting this statement; however, the Company expects that it will have a significant impact on the Company's consolidated balance sheet and statement of operations. The impact on the
Company's consolidated financial statements will be dependent on the transition method, the option-pricing model used to compute fair value and the inputs to that model such as volatility and expected
life. The pro forma disclosures of the impact of SFAS No. 123 provided in Note 1 may not be representative of the impact of adopting this statement.

In
March 2005, the SEC issued SAB 107, which offers guidance on SFAS No. 123(R). SAB 107 was issued to assist preparers by simplifying some of the implementation challenges
of SFAS No. 123(R) while enhancing the information that investors receive. SAB 107 creates a framework that is premised on two overarching themes: (a) considerable judgment will be
required by preparers to successfully implement FAS No. 123(R), specifically when valuing employee stock options; and (b) reasonable individuals, acting in good faith, may conclude
differently on the fair value of employee stock options. Key topics covered by SAB 107 include valuation models, expected volatility and expected term. The Company will apply the principles of SAB 107
in conjunction with its adoption of No. FAS 123(R).

In
November 2004, the FASB issued SFAS No. 151, "Inventory Costs-an Amendment of ARB No. 43, Chapter 4." This statement clarifies the accounting for
abnormal amounts of facility expense, freight, handling costs and wasted materials (spoilage) to require them to be recognized as current-period charges. This statement is effective for inventory
costs incurred during fiscal years beginning after June 15, 2005. Earlier application is permitted. The adoption of this standard is not expected to have a material impact on the Company's
consolidated balance sheet or statement of operations.

At
its March 2004 meeting, the EITF reached a consensus on recognition and measurement guidance previously discussed under EITF 03-01. The consensus clarified the
meaning of other-than-temporary impairment and its application to investments classified as either available-for-sale or
held-to-maturity under SFAS No. 115 and investments accounted for under the cost method or the equity method. In September 2004, the FASB delayed the recognition
and measurement guidance to be applied to other-than-temporary impairment evaluations. The FASB expects to issue additional implementation guidance with respect to debt
securities that are impaired solely due to interest rates and/or sector spreads.

F-11

---



Note 2. Business Acquisitions

IBM i/p Series RAID:On June 29, 2004, the Company completed the acquisition of the IBM i/p Series RAID component
business line consisting of certain purchased RAID data protection intellectual property, semiconductor designs and assets, and licensed from IBM related RAID intellectual property. The licensing
agreement grants the Company the right to use IBM's RAID technology and embedded Power PC technology for the Company's internal and external RAID products to be sold to IBM and other customers. In
conjunction with the acquisition, the Company also entered into a three-year exclusive product supply agreement under which the Company will supply RAID software, firmware and hardware to
IBM for use in IBM's iSeries and pSeries servers. The Company also entered into an agreement for IBM to provide silicon wafer manufacturing processing services to the Company for the term of the
supply agreement at agreed upon rates.

The
total purchase price was $49.5 million, which consisted of a cash payment to IBM of $47.5 million, warrants valued at $1.1 million, net of registration costs,
and transaction costs of $0.9 million. In connection with the acquisition, the Company issued a warrant to IBM to purchase 250,000 shares of the Company's common stock at an exercise price of
$8.13 per share. The warrant has a term of 5 years from the date of issuance and is immediately exercisable. The warrant was valued using the Black-
Scholes valuation model using a volatility rate of 62%, a risk-free interest rate of 3.9% and an estimated life of 5 years. The transaction costs consist primarily of legal,
valuation and other fees. The IBM i/p Series RAID business is included in the Company's OEM segment (Note 17).

The
Company also entered into a service agreement, which was subsequently amended, for IBM to provide certain research and development services and to provide access to IBM's
semiconductor design tools. The semiconductor design tools license agreement is for two years at a total cost of $8.4 million and is payable in quarterly installments; however, the agreement
can be cancelled by the Company in any quarter, which termination would relieve any obligations for the Company to make future quarterly installment payments to IBM.

The
IBM i/p Series RAID business was accounted for as a purchase business combination with the allocation of the purchase price to the tangible and intangible assets acquired summarized
below (in thousands). The allocation was based on management's estimates of fair value, which included an independent appraisal.

Net property and equipment

$
635Acquired in-process technology


3,000Goodwill


18,915Other intangible assets:Supply agreement


7,600Patents and core technology


18,700Foundry agreement


60026,900Net assets acquired (purchase price)

$
49,450


The
values allocated to the supply agreement, patents and core technology and foundry agreement are being amortized over estimated useful lives of 3 to 5 years, reflecting the
pattern in which the economic benefits of the assets are expected to be realized. The estimated weighted average useful life of other intangible assets, created as a result of the acquisition of the
IBM i/p Series RAID business, is

F-12

---



approximately
5 years. No residual value has been estimated for the intangible assets. A portion of goodwill is not expected to be deductible for tax purposes.

Snap Appliance:On July 23, 2004, the Company completed the acquisition of Snap Appliance, a provider of NAS products,
to expand its product offerings in the external storage market and to deliver cost-effective, scalable and easy-to-use DAS, NAS, Fibre Channel and
IP-based SAN products from the workgroup to the data center. The total purchase price was $84.4 million, consisting of $77.4 million in cash and transaction fees and
$7.0 million related to the fair value of assumed stock options to purchase 1.2 million shares of the Company's common stock. The assumed stock options were valued using the
Black-Scholes valuation model with the following assumptions: volatility rate of 58%; a risk-free interest rate of 2.6%; and an estimated life of 2.25 years. Snap Appliance is
included in the Company's Channel segment (Note 17).

Of
the total assumed stock options, stock options to purchase approximately 0.7 million shares of the Company's common stock, with exercise prices ranging between $1.42 and $5.66
per share, were unvested (the "Snap Unvested Options"). The Snap Unvested Options have a ten-year term and vest primarily over four years from the date of grant. The intrinsic value of the
Snap Unvested Options of $3.6 million was accounted for as deferred stock-based compensation and is being recognized as compensation expense over the related vesting periods. In fiscal 2005,
the Company recorded a reduction of $0.2 million of deferred stock-based compensation related to cancellations of Snap Unvested Options. In fiscal year 2005, the Consolidated Statement of
Operations included stock-based compensation expense with respect to Snap Unvested Options of $1.0 million.

The
preliminary allocation of the Snap Appliance purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands).
The preliminary allocation was based on management's estimates of fair value, which included an independent appraisal. The allocation of the purchase price may be subject to change based on final
estimates of fair value; however, such changes are not expected to be material.

Cash

$
60Accounts receivable


5,825Inventory


3,316Prepaid expenses


14,345Property and equipment


1,379Other long-term assets


148Total assets acquired


25,073Accounts payable


(4,264
)Current liabilities


(14,348
)Other long-term liabilities


(2,325
)Total liabilities assumed


(20,937
)Net tangible assets acquired

$
4,136


F-13

---



The
allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed is as follows (in thousands):

Net tangible assets acquired

$
4,136Acquired in-process technology


2,200Deferred stock-based compensation


3,610Deferred income tax liabilities


(11,640
)Goodwill


57,043Other intangible assets:Core and existing technologies


19,000Trade name


10,10029,100Net assets acquired (purchase price)

$
84,449


The
values allocated to the core and existing technologies and trade name created as a result of the acquisition of Snap Appliance are being amortized over an estimated weighted average
useful life of 7 years, reflecting the pattern in which the economic benefits of the assets are expected to be realized. No residual value has been estimated for the intangible assets. In
accordance with SFAS No. 142, the Company will not amortize the goodwill, but will evaluate it at least annually for impairment (Note 5). Goodwill is not expected to be deductible for
tax purposes.

In
addition, a management incentive program was established to pay former employees of Snap Appliance cash payments totaling $13.8 million, which is being paid, contingent upon
their employment with the Company, over a two-year period through the second quarter of fiscal 2007. Payments under the management incentive program will be expensed as employees meet
their employment obligations or are recorded as part of the Snap Appliance acquisition-related restructuring for involuntarily terminations by the Company. In fiscal 2005, the Consolidated Statements
of Operations included compensation expense related to the management incentive program of $5.7 million and an additional $1.4 million was originally accrued in the Snap Appliance
acquisition-related restructuring.

A
portion of the Snap Appliance acquisition price totaling $5.4 million was held back, and in connection with the management incentive program, $1.3 million will be held
back for a total of $6.7 million (the "Snap Appliance Holdback") for unknown liabilities that may have existed as of the acquisition date. The Snap Appliance Holdback will be paid in the second
quarter of fiscal 2006, except for funds necessary to provide for any pending claims.

Acquisition-Related Restructuring:In the third and fourth quarter of fiscal 2005, the Company
refined its plan to integrate the Snap Appliance operations related to integrating certain duplicative resources including severance and benefits in connection with the involuntary termination of
approximately 24 employees, exiting duplicative facilities and the disposal of duplicative assets. The acquisition-related restructuring liabilities were accounted for under EITF 95-3 and
therefore were included in the purchase price allocation of the cost to acquire Snap Appliance. The Company recorded a preliminary estimate of $6.0 million in the second quarter of fiscal 2005
for these activities. In the third and fourth quarters of fiscal 2005, the Company recorded a $0.8 million increase to the accrued restructuring charges with a corresponding change to goodwill
as its plans were further refined. The Company expects to execute the integration plan as currently designed; however, actual results and costs may differ as the plan is executed.

F-14

---



Any
further changes to the Company's estimate will result in an increase or decrease to the accrued restructuring charges and a corresponding increase or decrease to goodwill. As of March 31,
2005, the Company utilized $3.7 million of these charges. The Company anticipates that the remaining restructuring reserve balance of $3.1 million will be paid out by third quarter of
fiscal 2012, primarily related to long-term facility leases.

The
activity in the accrued restructuring reserve related to the Snap Appliance acquisition-related restructuring plan was as follows for fiscal 2005:

Severance And
Benefits

Other Charges

Total(in thousands)Snap Appliance Acquisition-Related Restructuring Plan:Restructuring provision

$
1,967

$
3,999

$
5,966Adjustments


646


109


755Cash paid


(2,111
)

(369
)

(2,480
)Non-cash charges


(347
)

(838
)

(1,185
)Reserve balance at March 31, 2005

$
155

$
2,901

$
3,056


Eurologic:On April 2, 2003, the Company completed the acquisition of Eurologic, a provider of external and networked
storage products. The Company acquired Eurologic to further enhance its direct-attached and fibre-attached server storage capabilities by allowing it to provide end-to-end
block- and file-based networked storage products. As consideration for the acquisition of all of the outstanding capital stock of Eurologic, the Company paid $25.6 million in cash,
subject to a Holdback as described below, and assumed stock options to purchase 0.5 million shares of the Company's common stock, with a fair value of $1.6 million. The Company also
incurred $1.1 million in transaction fees, including legal, valuation and accounting fees. The assumed stock options were valued using the Black-Scholes valuation model with the following
assumptions: volatility rate ranging from 57% to 81%; a risk-free interest rate ranging from 1.1% to 2.5%; and an estimated life ranging from 0.08 to 4 years. Eurologic's goodwill
and amortizable intangible assets were allocated based on the relative fair values of the Company's OEM and Channel segments (Note 17).

F-15

---





Holdback:As part of the Eurologic purchase agreement, $3.8 million of the cash payment was
held back (the "Holdback") for unknown liabilities that may have existed as of the acquisition date. The Holdback, which was included as part of the purchase price, is included in "Accrued
liabilities" in the Consolidated Balance Sheet as of March 31, 2005 and was to be paid to the former Eurologic stockholders 18 months after the acquisition closing date, except for funds
necessary to provide for any pending claims. The Company paid $2.3 million of the Holdback as of March 31, 2005 and has asserted claims against the remaining amount for liabilities of
which it became aware following the consummation of the transaction. The former Eurologic stockholders have disputed these claims and have requested release of the remaining Holdback.

Earn-out Payments:The Company also agreed to pay the stockholders of Eurologic
contingent consideration of up to $10.0 million in cash if certain revenue levels were achieved by the acquired Eurologic business in the period from July 1, 2003 through June 30,
2004. The milestone to achieve the contingent consideration was not attained as of June 30, 2004. As a result, no additional payments were made to the former stockholders of Eurologic.

The
allocation of the Eurologic purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands). The allocation was
based on management's estimates of fair value, which included an independent appraisal.

Cash

$
3,305Accounts receivable


10,624Inventory


4,066Other current assets


2,107Property and equipment


2,835Total assets acquired


22,937Accounts payable


(7,292
)Current liabilities


(8,365
)Total liabilities assumed


(15,657
)Net tangible assets acquired

$
7,280


F-16

---



The
allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed is as follows (in thousands):

Net tangible assets acquired

$
7,280Acquired in-process technology


3,649Goodwill


9,413Other intangible assets:Core technology


5,046Covenants-not-to-compete


148Customer relationships


880Trade name


1,476Current backlog


3957,945Net assets acquired

$
28,287


The
other intangible assets are being amortized over periods which reflect the pattern in which the economic benefits of the assets are expected to be realized. The core technology and
customer relationships are being amortized over an estimated useful life of four years, the trade name and covenants-not-to-compete are being amortized over two
years and the current backlog was fully amortized in the first quarter of fiscal 2004. The estimated weighted average useful life of other intangible assets, created as a result of the acquisition of
Eurologic, is approximately three years. No residual value is estimated for the other intangible assets. In accordance with SFAS No. 142, the Company will not amortize the goodwill, but will
evaluate it at least annually for impairment (Note 5). Goodwill is not expected to be deductible for tax purposes.

Acquisition-Related Restructuring:During the fourth quarter of fiscal 2004, the Company finalized
its plans to integrate the Eurologic operations. The integration plan included the involuntary termination or relocation of approximately 110 employees, exiting duplicative facilities and the
transition of all manufacturing operations from Dublin, Ireland to the Company's manufacturing facility in Singapore. The consolidation of the manufacturing operations as well as involuntary employee
terminations was completed in the fourth quarter of fiscal 2004. The acquisition-related restructuring liabilities were accounted for under EITF 95-3 and therefore were included in the
purchase price allocation of the cost to acquire Eurologic. The Company recorded a liability of $3.3 million in fiscal 2004 for these activities. As of December 31, 2004, the Company
utilized approximately all of these charges and the plan is materially complete.

ICP Vortex:On June 5, 2003, the Company completed the acquisition of ICP vortex. ICP vortex was a wholly-owned
subsidiary of Intel Corporation and provided a broad range of hardware and software RAID data protection products, including SCSI, SATA and fibre channel products. The final purchase price was
$14.5 million in cash, which included $0.3 million in transaction fees, consisting of legal, valuation and accounting fees. This purchase price included a final adjustment of
$0.1 million in the first quarter of fiscal 2005 to both goodwill and acquisitions costs. ICP vortex's goodwill and amortizable intangible assets were allocated based on the relative fair
values of the Company's OEM and Channel segments (Note 17).

F-17

---



The
allocation of the ICP vortex purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands). The allocation was
based on management's estimate of fair value, which included an independent appraisal.

Cash

$
2,706Accounts receivable


2,961Inventory


2,015Other current assets


3,087Property and equipment


1,458Total assets acquired


12,227Accounts payable


(722
)Current liabilities


(2,522
)Long-term liabilities


(400
)Total liabilities assumed


(3,644
)Net tangible assets acquired

$
8,583


The
allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed is as follows (in thousands):

Net tangible assets acquired

$
8,583Goodwill


1,050Other intangible assets:Core technology


3,630Customer relationships


410Trade name


830Royalties


604,930Net assets acquired (Purchase Price)

$
14,563


The
other intangible assets are being amortized over periods which reflect the pattern in which the economic benefits of the assets are expected to be realized. The core technology and
trade name are being amortized straight-line over an estimated useful life of three years, the customer relationships are being amortized straight-line over four years and the
royalties were amortized through the end of the third quarter of 2004. The estimated weighted average useful life of other intangible assets, created as a result of the acquisition of ICP vortex, is
approximately three years. No residual value is estimated for the other intangible assets. In accordance with SFAS No. 142, the Company will not amortize the goodwill, but will evaluate it at
least annually for impairment (Note 5). Goodwill is not expected to be deductible for tax purposes.

During
the first quarter of fiscal 2005, the Company finalized its plans to integrate the ICP vortex operations. The integration plan included the involuntary termination of 19
employees, the transfer of manufacturing operations to Singapore and the integration of certain duplicative resources. The acquisition-related restructuring liabilities were accounted for under EITF
95-3 and therefore were included in the purchase price allocation of the cost to acquire ICP vortex. In fiscal 2004, the Company

F-18

---



recorded
a liability of $0.4 million for severance and benefits, of which $0.3 million of these charges were utilized and $0.1 million was recorded as a reduction to the
restructuring liability with a corresponding decrease to goodwill in the first quarter of fiscal 2005.

Elipsan:On February 13, 2004, the Company completed the acquisition of Elipsan, a provider of networked storage
infrastructure software. The Company acquired Elipsan's storage virtualization technology to enable the Company to make storage more cost-effective, easier to scale and to increase
performance across multiple RAID subsystems. The final purchase price was $19.4 million in cash, which included $0.7 million in transaction fees, consisting of legal, valuation and
accounting fees. This purchase price included a final adjustment of $0.8 million in fiscal 2005, primarily related to the reversal of the acquisition-related restructuring reserves of
approximately $0.7 million. Elipsan's goodwill and amortizable intangible assets were allocated based on the relative fair values of the Company's OEM and Channel segments (Note 17).

Holdback:As part of the Elipsan purchase agreement, $2.0 million of the cash payment was held
back ("Elipsan Holdback") for unknown liabilities that may have existed as of the acquisition date. The Elipsan Holdback, which was included as part of the purchase price, is included in "Accrued
liabilities" in the Consolidated Balance Sheet as of March 31, 2005 and will be paid to the former Elipsan
stockholders 18 months after the acquisition closing date, except for funds necessary to provide for any unknown liabilities.

The
allocation of the Elipsan purchase price to the tangible and identifiable intangible assets acquired and liabilities assumed is summarized below (in thousands). The allocation was
based on management's estimates of fair value, which included an independent appraisal.

Accounts receivable

$
162Other current assets


731Property and equipment


105Total assets acquired


998Accounts payable


(171
)Current liabilities


(1,497
)Total liabilities assumed


(1,668
)Net tangible liabilities acquired

$
(670
)


The
allocation of the purchase price to the tangible and intangible assets acquired and liabilities assumed is as follows (in thousands):

Net tangible assets acquired

$
(670
)Acquired in-process technology


4,000Goodwill


3,479Core technology


12,600Net assets acquired (Purchase Price)

$
19,409


The
core technology is being amortized straight-line over an estimated useful life of five years. No residual value has been estimated for the intangible asset.. In
accordance with SFAS No. 142, the Company

F-19

---



will
not amortize the goodwill, but will evaluate it at least annually for impairment. Goodwill is not expected to be deductible for tax purposes.

Acquisition-Related Restructuring:During the fourth quarter of fiscal 2005, the Company finalized
its plans to integrate the Elipsan operations. The plan included the integration of certain duplicative resources related to both severance and benefits in connection with the involuntary termination
or relocation of employees and, accordingly, the Company recorded a $0.8 million reserve as of March 31, 2004. In fiscal 2005, the Company recorded an adjustment of $0.7 million
as a reduction to the liability with a corresponding decrease to goodwill as the Company intends to retain these employees. The acquisition-related restructuring liabilities were accounted for under
EITF 95-3 and therefore were included in the purchase price allocation of the cost to acquire Elipsan. As of March 31, 2005, the Company made payments of approximately $25,000 under
the plan. The Company anticipates that the remaining restructuring reserve balance of approximately $45,000 will be paid out by the second quarter of fiscal 2006.

In-process Technology

As part of the purchase agreements of Snap Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan, certain amounts of the purchase prices were
allocated to acquired in-process technology which were determined through established valuation techniques in the high-technology computer industry and written off in the
second quarter of fiscal 2005, first quarter of fiscal 2005, first quarter of fiscal 2004 and fourth quarter of fiscal 2004, respectively, because technological feasibility had not been established
and no alternative future uses existed. The values were determined by estimating the net cash flows and discounting the estimated net cash flows to their present values. A summary of the amounts
written off were as follows:

AcquiredIn-Process Technology(in thousands)Snap Appliance1

$
2,200IBM i/p Series RAID business2


3,000Eurologic3


3,649Elipsan4


4,000


---

F-20

---



The
net cash flows from the identified projects were based on estimates of revenues, cost of revenues, research and development expenses, including costs to complete the projects,
selling, marketing and administrative expenses, royalty expenses and income taxes from the projects. The Company believes the assumptions used in the valuations were reasonable at the time of the
acquisitions. The estimated net revenues and gross margins were based on management's projections of the projects and were in line with industry averages. Estimated total net revenues from the
projects of Snap Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan were expected to grow through fiscal 2009, fiscal 2009, fiscal 2008 and fiscal 2007, respectively, and decline
thereafter as other new products are expected to become available. Estimated operating expenses included research and development expenses and selling, marketing and administrative expenses based upon
historical and expected direct expense levels and general industry metrics. Estimated research and development expenses included costs to bring the projects to technological feasibility and costs
associated with activities undertaken to correct errors or keep products updated with current information (also referred to as "maintenance" research and development) after a product is available for
general release to customers. These activities range from 0% to 5% of net revenues for the in-process technologies.

The
effective tax rate used in the analysis of the in-process technologies reflects a combined historical industry specific average for the United States Federal and state
statutory income tax rates. The cost of capital reflects the estimated time to complete the projects and the level of risk involved. The following discount rates were used in computing the present
value of net cash flows for the acquired companies: approximately 24% for Snap Appliance, between 23% and 28% for the IBM i/p Series RAID business, approximately 27% for Eurologic and approximately
63% for Elipsan.

The
percentage of completion was determined using costs incurred by Snap Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan prior to their respective acquisition dates
compared to the estimated remaining research and development to be completed to bring the projects to technological feasibility. The Company estimated, as of the respective acquisition dates for, Snap
Appliance, the IBM i/p Series RAID business, Eurologic and Elipsan, that the projects were approximately 25% complete, 50% complete, 60% complete and 28% complete, respectively. All projects
outstanding as of the acquisition dates for Eurologic and Elipsan were completed as of March 31, 2004 and December 31, 2004, respectively. The Company expects remaining costs of
approximately $0.3 million and $12.3 million related to Snap Appliance and the IBM i/p Series RAID business, respectively, to bring the planned in-process projects to
completion.

Pro Forma Results:The following unaudited pro forma financial information for fiscal years 2005 and 2004 presents the
combined results of the Company and the IBM i/p Series RAID business, Snap Appliance, ICP vortex and Elipsan, as if the acquisitions had occurred at the beginning of the periods presented. Eurologic
was not included in the calculation as the results of Eurologic have been included in the Company's financial statements from April 2, 2003. Certain adjustments have been made to the combined
results of operations, including amortization of acquired other intangible assets; however,

F-21

---



charges
for purchased in-process technology were excluded as these items were non-recurring. The pro forma financial results for fiscal years 2005 and 2004 were as follows:

Years Ended March 31,2005

2004(in thousands, except per share amounts)Net revenues

$
489,171

$
541,822Net income (loss)


(152,454
)

35,884Net income (loss) per share:Basic

$
(1.38
)
$
0.33Diluted

$
(1.38
)
$
0.31


The
pro forma financial information does not necessarily reflect the results of operations that would have occurred had the Company and Eurologic, ICP vortex and Elipsan constituted a
consolidated entity during such periods.

Platys:In connection with the Platys Communications, Inc. ("Platys") acquisition in August 2001,
$15.0 million of the cash payment was held back (the "General Holdback") for unknown liabilities that may have existed as of the acquisition date. In fiscal 2003 and fiscal 2004, the Company
paid $10.7 million and $3.6 million, respectively, of the General Holdback to the former Platys shareholders or for the settlement of certain claims on their behalf. The remaining
$0.7 million of the General Holdback will be paid to the Platys shareholders upon resolution of the outstanding claims, except for funds necessary to provide for liabilities with respect to the
claims submitted by the former Platys employees and consultants.

In
fiscal years 2005, 2004 and 2003, the Company recorded reductions of $0.4 million, $1.3 million and $2.4 million, respectively, of deferred stock-based
compensation related to cancellations of assumed Platys stock options that were unvested and repurchases of unvested Platys restricted stock. In fiscal years 2005, 2004 and 2003, the Consolidated
Statement of Operations included stock-based compensation expense with respect to the restricted stock and/or the unvested options of $2.0 million, $4.1 million, and
$10.6 million, respectively.

F-22

---



Note 3. Marketable Securities

The Company's portfolio of marketable securities at March 31, 2005 was as follows:

|                                            |  | Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Estimated
Fair
Value
|------------------------------------------- |  | ---- | ------- | ---------------------- | - | ----------------------- |  | --------------------
|
|Available-for-Sale Marketable Securities:   |  |      |         |                        |   |                         |  |                     
|Short-term deposits                         |  | $    | 373,190 |                        | $ |                        |  | $                   
|Corporate obligations                       |  |      | 32,119  |                        |   |                        |  |                     
|United States government securities         |  |      | 22,864  |                        |   | 2                       |  |                     
|Other debt securities                       |  |      | 43,917  |                        |   | 160                     |  |                     
|                                            |  |      |         |                        |   |                         |  |                     
|Total available-for-sale securities         |  |      | 472,090 |                        |   | 162                     |  |                     
|Less amounts classified as cash equivalents |  |      | 379,915 |                        |   |                        |  |                     
|                                            |  |      |         |                        |   |                         |  |                     
|Total                                       |  | $    | 92,175  |                        | $ | 162                     |  | $                   
|                                            |  |      |         |                        |   |                         |  |                     

The
Company's portfolio of marketable securities at March 31, 2004 was as follows:

|                                            |  | Cost |         | Gross
Unrealized
Gains |   | Gross
Unrealized
Losses |  | Estimated
Fair
Value
|------------------------------------------- |  | ---- | ------- | ---------------------- | - | ----------------------- |  | --------------------
|
|Available-for-Sale Marketable Securities:   |  |      |         |                        |   |                         |  |                     
|Short-term deposits                         |  | $    | 6,838   |                        | $ |                        |  | $                   
|Municipal bonds                             |  |      | 16,550  |                        |   |                        |  |                     
|Commercial paper                            |  |      | 999     |                        |   |                        |  |                     
|Corporate obligations                       |  |      | 200,636 |                        |   | 2,086                   |  |                     
|United States government securities         |  |      | 175,609 |                        |   | 982                     |  |                     
|Other debt securities                       |  |      | 194,705 |                        |   | 722                     |  |                     
|Marketable equity securities                |  |      | 873     |                        |   |                        |  |                     
|                                            |  |      |         |                        |   |                         |  |                     
|Total available-for-sale securities         |  |      | 596,210 |                        |   | 3,790                   |  |                     
|Less amounts classified as cash equivalents |  |      | 30,435  |                        |   |                        |  |                     
|                                            |  |      |         |                        |   |                         |  |                     
|Total                                       |  | $    | 565,775 |                        | $ | 3,790                   |  | $                   
|                                            |  |      |         |                        |   |                         |  |                     

In
fiscal 2004, the Company retained 190,936 shares of Roxio's common stock upon the potential exercise of outstanding warrants which expired unexercised in January 2004. In
accordance with SFAS No. 115, this common stock was classified as available-for-sale securities and recorded at fair market value and included in "Marketable securities"
in the Consolidated Balance Sheet as of March 31, 2004. The Company sold the securities in fiscal 2005.

Sales
of marketable securities resulted in gross realized gains of $0.6 million, $2.5 million and $3.2 million during fiscal years 2005, 2004 and 2003, respectively.
Sales of marketable securities resulted in gross realized losses of $5.9 million, $1.4 million and $2.9 million during fiscal years 2005, 2004 and 2003, respectively. In the
fourth quarter of fiscal 2005, the Company repatriated $360.6 million of undistributed earnings from Singapore to the United States. In connection with this transaction, the Company liquidated
$408.6 million of investments held by its Singapore subsidiary resulting in gross realized losses of $4.5 million.

F-23

---



The
following table summarizes the fair value and gross unrealized losses of our available-for-sale marketable securities, aggregated by type of investment
instrument and length of time that individual securities have been in a continuous unrealized loss position, at March 31, 2005:

|                                    |  | Less than 12 Months |        | 12 Months or Greater |   | Total |  
|----------------------------------- |  | ------------------- | ------ | -------------------- | - | ----- | -
|
|
|Corporate obligations               |  | $                   | 20,106 |                      | $ | (273  | )
|United States government securities |  |                     | 9,460  |                      |   | (122  | )
|Other debt securities               |  |                     | 13,468 |                      |   | (119  | )
|                                    |  |                     |        |                      |   |       |  
|                                    |  | $                   | 43,034 |                      | $ | (514  | )
|                                    |  |                     |        |                      |   |       |  

Our investment portfolio consists of both corporate and government securities that have a maximum maturity of three years. The longer the duration
of these securities, the more susceptible they are to changes in market interest rates and bond yields. As yields increase, those securities purchased with a lower
yield-at-cost show a mark-to-market
unrealized loss. All unrealized losses are due to changes in interest rates and bond yields. We expect to realize the full value of all these investments upon maturity or sale.

The
amortized cost and estimated fair value of investments in available-for-sale debt securities at March 31, 2005, by contractual maturity, were as
follows:

Available-for-Sale
Debt Securities
Cost

Estimated
Fair Value(in thousands)Mature in one year or less

$
420,948

$
420,860Mature after one year through three years


51,142


50,317Total

$
472,090

$
471,177


The
maturities of asset- and mortgage-backed securities were allocated primarily based upon assumed prepayment forecasts utilizing interest rate scenarios and mortgage loan
characteristics.

F-24

---



Note 4. Balance Sheets Details

Inventories

The components of net inventories at March 31, 2005 and 2004 were as follows:

March 31,2005

2004(in thousands)Raw materials

$
15,914

$
16,244Work-in-process


7,435


6,210Finished goods


36,855


26,434Total

$
60,204

$
48,888


Property and Equipment

The components of property and equipment at March 31, 2005 and 2004 were as follows:

March 31,Life

2005

2004(in thousands)Land



$
9,537

$
9,537Buildings and improvements

5-40 years


43,439


42,788Machinery and equipment

3-5 years


83,304


88,340Furniture and fixtures

3-7 years


64,093


68,506Leasehold improvements

Lower of useful life or life of lease


5,547


4,909Construction in progress




162


375206,082


214,455Accumulated depreciation and amortization




(149,902
)

(156,020
)Total



$
56,180

$
58,435


Depreciation
expense was $15.2 million, $20.1 million and $24.0 million in fiscal years 2005, 2004 and 2003, respectively.

F-25

---



Accrued Liabilities

The components of accrued liabilities at March 31, 2005 and 2004 were as follows:

March 31,2005

2004(in thousands)Tax related

$
57,538

$
65,812Acquisition related


6,748


8,200Accrued compensation and related taxes


18,304


19,336IBM distribution agreement (Note 13)


11,575


Other


21,842


13,044Total

$
116,007

$
106,392


Accumulated Other Comprehensive Income

The components of accumulated other comprehensive income, net of income taxes, at March 31, 2005 and 2004 were as follows:

March 31,2005

2004(in thousands)Unrealized gain on marketable securities, net of tax of $in fiscal 2005 and $1,443 in fiscal 2004

$
(546
)
$
2,186Foreign currency translation, net of tax of $834 in fiscal 2005 and $543 in fiscal 2004


1,252


814Total

$
706

$
3,000


Note 5. Goodwill and Other Intangible Assets



Goodwill allocated to the Company's reportable segments and changes in the carrying amount of goodwill for fiscal 2005 was as follows:

|                               |  | SSG |         | SNG |   | OEM     |   | Channel |        | Total |  
|------------------------------ |  | --- | ------- | --- | - | ------- | - | ------- | ------ | ----- | -
|
|Balance at March 31, 2004      |  | $   | 22,825  |     | $ | 45,667  |   | $       |       |       | $
|Reallocation (See Note 17)     |  |     | (22,825 | )   |   | (45,667 | ) |         | 30,326 |       |  
|Goodwill acquired (See Note 2) |  |     |        |     |   |        |   |         | 18,915 |       |  
|Goodwill impairment            |  |     |        |     |   |        |   |         |       |       |  
|Goodwill adjustments           |  |     |        |     |   |        |   |         | (458   | )     |  
|                               |  |     |         |     |   |         |   |         |        |       |  
|Balance at March 31, 2005      |  | $   |        |     | $ |        |   | $       | 48,783 |       | $
|                               |  |     |         |     |   |         |   |         |        |       |  

F-26

---



The
goodwill reallocation shown in the table above related to the reorganization of certain of the Company's reportable segments are discussed in Note 17. The goodwill formerly
included in the SSG and SNG segments was allocated between the OEM and Channel segments based on a relative fair value approach using an independent appraisal and management estimates of fair value of
the segments. No impairment was recorded as a result of the change in segments.

Goodwill
is not amortized, but instead is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at
the Company's reporting unit level which is at the segment level by comparing each segment's carrying amount, including goodwill, to the fair value of that segment. To determine fair value, the
Company's review process uses the income, or discounted cash flows, approach and the market approach. In performing its analysis, the Company uses the best information available under the
circumstances, including reasonable and supportable assumptions and projections. If the carrying amount of the reporting unit exceeds its implied fair value, goodwill is considered impaired and a
second step is performed to measure the amount of impairment loss, if any. Based on its annual review of goodwill in the fourth quarter of fiscal 2005, the Company recorded an impairment charge of
$52.3 million related to its Channel segment. Factors that led to this conclusion included, but were not limited to, the negative impact of estimates of expected future income associated with
increased costs related to recent acquisitions and business alliances that occurred in fiscal 2005. These additional costs, along with industry technology transitions, place significant risk on the
Company's ability to achieve and maintain profitability, and, therefore have adversely impacted its profitability forecasts. The Company's annual review of goodwill in the fourth quarter of fiscal
2004 and 2003 determined that there was no impairment related to its goodwill.



|                                          |  | March 31, 2005 |         | March 31, 2004 |  
|----------------------------------------- |  | -------------- | ------- | -------------- | -
|
|
|Acquisition-related intangible assets:    |  |                |         |                |  
|Patents, core and existing technologies   |  | $              | 112,630 |                | $
|Supply agreement                          |  |                | 7,600   |                |  
|Covenants-not-to-compete                  |  |                | 4,818   |                |  
|Customer relationships                    |  |                | 1,290   |                |  
|Trade names                               |  |                | 12,406  |                |  
|Foundry agreement                         |  |                | 600     |                |  
|Backlog and royalties                     |  |                | 455     |                |  
|                                          |  |                |         |                |  
|Subtotal                                  |  |                | 139,799 |                |  
|Intellectual property assets and warrants |  |                | 44,868  |                |  
|                                          |  |                |         |                |  
|Total                                     |  | $              | 184,667 |                | $
|                                          |  |                |         |                |  

Intellectual
property assets consist of a patent license fee (Note 13), a technology license fee (Note 13), an amount allocated to a product supply agreement
(Note 13) and certain intellectual property acquired in fiscal 2003.

F-27

---



In
August 2004, the Company entered into an agreement to sell external storage products to IBM. In connection with the agreement, the Company issued IBM a warrant to purchase
250,000 shares of the Company's common stock at an exercise price of $6.94 per share. The warrant has a term of five years from the date of issuance and was immediately exercisable. The warrant was
valued at $1.0 million using the Black-Scholes valuation model using a volatility rate of 62%, a risk-free interest rate of 4.0% and an estimated life of 5 years. The value
of the warrant was fully expensed against "net revenues," as the economic benefits were not considered probable at March 31, 2005.

Other
intangible assets increased by approximately $57.0 million in fiscal 2005 as a result of the Company's acquisitions of the IBM i/p Series RAID business and Snap Appliance
and an agreement entered into with IBM discussed above. Other intangible assets increased by approximately $25.5 million in fiscal 2004 as a result of the Company's acquisitions of Eurologic,
ICP vortex and Elipsan. Amortization of other intangible assets was $26.4 million, $24.0 million and $20.0 million in fiscal years 2005, 2004 and 2003, respectively.

The
annual amortization expense of the other intangible assets that existed as of March 31, 2005 is expected to be as follows:

Estimated Amortization ExpenseAcquisition-related
intangible assets

Intellectual
property assets
and warrants(in thousands)Fiscal years:2006

$
17,375

$
6,6692007


14,591


6,3162008


11,476


1,6912009


10,722


2010 and thereafter


10,617


Total

$
64,781

$
14,676


F-28

---





Note 6. Convertible Notes

March 31,2005

2004(in thousands)3/4% Notes

$
225,000

$
225,0003% Notes


35,190


35,190Total

$
260,190

$
260,190


3/4% Notes:In December 2003, the Company issued $225.0 million in aggregate principal amount of
3/4% Notes due December 22, 2023. The issuance costs associated with the 3/4% Notes totaled $6.8 million and the net proceeds to the Company from the
offering of the Notes were $218.2 million.

The
3/4% Notes are convertible at the option of the holders into shares of the Company's common stock, par value $0.001 per share, only under the following circumstances:
(1) prior to December 22, 2021, on any date during a fiscal quarter if the closing sale price of the Company's common stock was more than 120% of the then current conversion price of the
3/4% Notes for at least 20 trading days in the period of the 30 consecutive trading days ending on the last trading day of the previous fiscal quarter, (2) on or after
December 22, 2021, if the closing sale price of the Company's common stock was more than 120% of the then current conversion price of the 3/4% Notes, (3) if the Company
elects to redeem the 3/4% Notes, (4) upon the occurrence of specified corporate transactions or significant distributions to holders of the Company's common stock occur or
(5) subject to certain exceptions, for the five consecutive business day period following any five consecutive trading day period in which the average trading price of the 3/4%
Notes was less than 98% of the average of the sale price of the Company's common stock during such five-day trading period multiplied by the 3/4% Notes then current
conversion rate. Subject to the above conditions, each $1,000 principal amount of 3/4% Notes is convertible into approximately 85.4409 shares of the Company's common stock (equivalent
to an initial conversion price of approximately $11.704 per share of common stock).

The
Company may redeem some or all of the 3/4% Notes for cash on December 22, 2008 at a redemption price equal to 100.25% of the principal amount of the notes being
redeemed, plus accrued interest to, but excluding, the redemption date. After December 22, 2008, the Company may redeem some or all of the 3/4% Notes for cash at a redemption
price equal to 100% of the principal amount of the notes being redeemed, plus accrued interest to, but excluding, the redemption date.

Each
holder of the 3/4% Notes may require the Company to purchase all or a portion of their 3/4% Notes on December 22, 2008 at a price equal to
100.25% of the 3/4% Notes to be purchased plus accrued and unpaid interest. In addition, each holder of the 3/4% Notes may require the Company to purchase all or a
portion of their 3/4% Notes on December 22, 2013, on December 22, 2018 or upon the occurrence of a change of control (as defined in the Indenture governing the
3/4% Notes) at a price equal to the principal amount of 3/4% Notes being purchased plus any accrued and unpaid interest.

The
Company will pay cash interest at an annual rate of 3/4% of the principal amount at issuance, payable semi-annually on June 22 and
December 22 of each year, which interest payments commenced on June 22, 2004. Debt issuance costs of $6.8 million are being amortized to interest expense over 5 years. The
3/4% Notes rank senior in right of payment to the 3% Convertible Subordinated Notes due 2007 ("3% Notes"). The 3/4% Notes rank junior in right of payment of the 3% Notes
and are subordinated to all other existing and future senior indebtedness of the Company.

F-29

---



In
connection with the issuance of the 3/4% Notes, the Company purchased marketable securities totaling $7.9 million as security for the first ten scheduled
interest payments due on the 3/4% Notes. The marketable securities, which consist of United States government securities, are reported at fair market value with unrealized gains and
losses, net of income taxes, recorded in "Accumulated other
comprehensive income, net of taxes" as a separate component of the stockholders' equity on the Consolidated Balance Sheets. At March 31, 2005, $1.8 million was classified as
short-term marketable securities due within one year and $4.6 million was classified as long-term due within three years.



Concurrent with the issuance of the 3/4% Notes, the Company entered into a convertible bond hedge transaction with an affiliate of one of the
initial purchasers of the 3/4% Notes. Under the convertible bond hedge arrangement, the counterparty agreed to sell to the Company up to 19.2 million shares of the Company's
common stock, which is the number of shares issuable upon conversion of the 3/4% Notes in full, at a price of $11.704 per share. The convertible bond hedge transaction may be settled at
the Company's option, either in cash or net shares, and expires in December 2008. Settlement of the convertible bond hedge in net shares on the expiration date would result in the Company
receiving a number of shares of its common stock with a value equal to the amount otherwise receivable on cash settlement. Should there be an early unwind of the convertible bond hedge transaction,
the amount of cash or net shares potentially received by the Company will depend upon then existing overall market conditions, and on the Company's stock price, the volatility of the Company's stock
and the amount of time remaining on the convertible bond hedge. The convertible bond hedge transaction cost of $64.1 million has been accounted for as an equity transaction in accordance with
EITF No. 00-19.

During
the fourth quarter of fiscal 2004, in conjunction with the issuance of the 3/4% Notes, the Company received $30.4 million from the issuance to an affiliate
of one of the initial purchasers of the 3/4% Notes of a warrant to purchase up to 19.2 million shares of the Company's common stock at an exercise price of $18.56 per share. The
warrant expires in December 2008. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis or for cash. As of March 31, 2004, the warrant had not
been exercised and remained outstanding. The warrant was valued using the Black-Scholes valuation model using a volatility rate of 42%, risk-free interest rate of 3.6% and an expected life
of 5 years. The value of the warrant of $30.4 million has been classified as equity because it meets all the equity classification criteria of EITF 00-19. The separate
warrant and convertible bond hedge transactions have the potential of limiting the dilution associated with the conversion of the 3/4% Notes from approximately 19.2 million to as
few as 12.1 million shares.

3% Notes:In March 2002, the Company issued $250 million in aggregate principal amount of 3% Notes for net
proceeds of $241.9 million. The 3% Notes are due on March 5, 2007. The 3% Notes provide for semi-annual interest payments each March 5 and September 5, which
interest payments commenced September 5, 2002. The holders of the 3% Notes are entitled to convert the notes into common stock at a conversion price of $15.31 per share through March 5,
2007. The 3% Notes are redeemable, in whole or in part, at the option of the Company, at any time on or after March 9, 2005 at declining premiums to par. Debt issuance costs are amortized to
interest expense ratably over the term of the 3% Notes. The Notes are subordinated to all other existing and future senior indebtedness of the Company.

In
connection with the issuance of the 3% Notes, the Company purchased marketable securities totaling $21.4 million as security for the first six scheduled interest payments due
on the 3% Notes. The

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marketable
securities, which consist of United States government securities, are reported at fair market value with unrealized gains and losses, net of income taxes, recorded in "Accumulated other
comprehensive income, net of taxes" as a separate component of the stockholders' equity on the Consolidated Balance Sheets. Gross unrealized gains on these securities were $0.3 million in
fiscal 2003 and gross unrealized losses on these securities were $0.2 million in fiscal 2002. In fiscal 2004, the Company utilized a portion of the proceeds from the issuance of
3/4% Notes and repurchased $214.8 million in aggregate principal amount of the 3% Notes, resulting in a loss on extinguishment of debt of $5.7 million (including
unamortized debt issuance costs of $5.0 million). Due to the partial repurchase of the 3% Notes, the restriction on $9.4 million of the restricted marketable securities lapsed. At
March 31, 2005 and 2004, $0.1 million and $1.1 million, respectively, was classified as restricted cash in connection with the remaining $35.2 million outstanding 3% Note
balance.

Subsequent
to fiscal year-end, the Company repurchased $18.8 million of the 3% Notes on the open market for $18.6 million, resulting in a loss on the early
extinguishment of debt of $0.1 million (including unamortized debt issuance costs of $0.3 million). The loss on extinguishment of debt will be included in "Interest and other income" in
the Consolidated Statements of Operations in the first quarter of fiscal 2006.

43/4% Notes:In February 1997, the Company issued $230.0 million in aggregate principal amount
of 43/4% Notes for net proceeds of $223.9 million. The 43/4% Notes were due on February 1, 2004 and provided for semi-annual interest payments
each February 1 and August 1, which interest payments commenced on August 1, 1997. The holders of the 43/4% Notes were entitled to convert the notes into common
stock at an original conversion price of $51.66 per share through February 1, 2004. The 43/4% Notes were redeemable, in whole or in part, at the option of the Company, at any
time at declining premiums to par. Debt issuance costs were amortized to interest expense ratably over the term of the 43/4% Notes. During fiscal 2000, a noteholder converted
$0.2 million of the 43/4% Notes into 3,871 shares of the Company's common stock.

As
a result of the Roxio (which is now known as Napster) spin-off and in accordance with the terms of the 43/4% Notes' indenture, the conversion price was
adjusted to $38.09 per share. The adjusted conversion price was determined by multiplying $51.66, the original conversion price, by a ratio equal to (1) the difference between the price of the
Company's common stock at the date of the Roxio spin-off, as defined in the Indenture, and the fair market value of Roxio's common stock as determined by the Company's Board of Directors,
(2) divided by the price of the Company's common stock at the date of the Roxio spin-off.

In
fiscal 2004, the Company redeemed the outstanding $82.4 million balance of its 43/4% Notes for an aggregate price of $83.0 million, resulting in a loss on
extinguishment of debt of $0.8 million (including unamortized debt issuance costs of $0.2 million). In fiscal 2003, the Company repurchased 43/4% Notes with a book value
of $120.4 million for an aggregate price of $116.3 million, resulting in a gain on extinguishment of debt of $3.3 million (net of unamortized debt issuance costs of
$0.8 million). The gain on extinguishment of debt has been included in "Interest and other income" in the Consolidated Statements of Operations for fiscal 2004 and 2003.

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Note 7. TSMC Agreements

During fiscal 1996, the Company entered into agreements with TSMC, which was subsequently amended in fiscal 1999, 2000 and 2002, which provide the Company with
guaranteed capacity for wafer fabrication in exchange for advance payments ("Option Agreements"). The Company reflected the advance payments as either prepaid expenses or other long-term
assets based upon the amount expected to be utilized within the next twelve months. As wafer units are purchased each year from TSMC, the advance payments are reduced at a specified amount per wafer
unit.

The
Company utilized $6.6 million, $9.3 million and $11.2 million of the advance payments in fiscal years 2005, 2004 and 2003, respectively. The advance payments
have been fully utilized as of March 31, 2005.

Note 8. Interest and Other Income

The components of interest and other income for all periods presented were as follows:

|                                                    |  | Years Ended March 31, |       
|--------------------------------------------------- |  | --------------------- | ------
|
|
|Interest income                                     |  | $                     | 11,799
|Gain on settlement with former president of DPT     |  |                       |      
|Payment of license fee with NSE                     |  |                       | (1,692
|Realized loss on repatriation (Note 3)              |  |                       | (4,466
|Gain (loss) on extinguishment of debt, net (Note 6) |  |                       |      
|Foreign currency transaction gains (losses)         |  |                       | 692   
|Interest on tax refunds                             |  |                       | 691   
|Other                                               |  |                       | 1,345 
|                                                    |  |                       |       
|Total                                               |  | $                     | 8,369 
|                                                    |  |                       |       

In
June 2004, the Company, Nevada SCSI Enterprises, Inc. and Thomas A. Gafford (jointly, "NSE") entered into a license and release agreement, pursuant to which the Company
paid NSE $1.3 million as a one-time, fully paid-up license fee to settle NSE's claims that some of the Company's products infringed certain patents. The license and
release agreement expressly excluded any sales of products made by Eurologic prior to the Company's April 2003 acquisition of Eurologic. In November 2004, the Company exercised its
option to secure a license and release with respect to such Eurologic sales by payment to NSE of a royalty fee of $0.4 million. The Company has filed a claim against the Eurologic acquisition
Holdback for the $0.4 million royalty it paid with respect to Eurologic's pre-acquisition sales. The Eurologic shareholders are disputing the Company's right to withhold the
$0.4 million from the Holdback.

In
December 1999, the Company purchased Distributed Processing Technology Corporation ("DPT"). As part of the purchase agreement, $18.5 million of the purchase price was
held back ("Holdback Amount") from former DPT stockholders for unknown liabilities that may have existed as of the acquisition date. The Holdback Amount was included in "Accrued liabilities" in the
Consolidated Balance Sheet at March 31, 2003. Subsequent to the date of purchase, the Company determined that certain representations and warranties made by the DPT stockholders were incomplete
or inaccurate, which caused the Company to lose revenues and incur additional expenses. This caused the Company to file court proceedings against Steven Goldman, the principal shareholder and former
president of DPT,

F-32

---



alleging
causes of action for, amongst others, fraud, fraudulent inducement, and negligent misrepresentation. In May 2003, the Company entered into a written settlement and a mutual general
release agreement with Steven Goldman, on his own and on behalf of all the selling shareholders of DPT, pursuant to which it was agreed that the Company would retain the Holdback Amount and,
additionally, Steven Goldman would pay the Company $31.0 million. The Company received the $31.0 million payment in May 2003 and recorded a gain of approximately
$49.3 million in fiscal 2004. The cash received from the DPT settlement of $31.0 million was included in cash provided from operating activities in the Consolidated Statements of Cash
Flows.

Note 9. Restructuring Charges

During fiscal years 2005, 2004 and 2003, the Company recorded restructuring charges of $5.9 million, $4.3 million and $14.3 million,
respectively. All expenses, including adjustments, associated with our restructuring plans are included in "Restructuring charges" in the Consolidated Statements of Operations and are not allocated to
segments but rather managed at the corporate level. The restructuring plans are discussed in detail below.

Fiscal 2005 Restructuring Plans

Fourth Quarter of Fiscal 2005 Restructuring Plan:In the fourth quarter of fiscal 2005, the Company
initiated certain actions to consolidate primarily engineering resources in connection with the Vitesse Semiconductor Corporation ("Vitesse") strategic alliance (Note 10) and recorded a
restructuring charge of $0.5 million. The Company does not expect to incur any further charges in connection with this restructuring plan.

Third Quarter of Fiscal 2005 Restructuring Plan:In the third quarter of fiscal 2005, the Company
initiated certain actions to simplify the Company's structure by streamlining the corporate organization and reducing operating costs. This resulted in a restructuring charge of $2.4 million,
which related to the involuntary termination of 46 employees in all functions of the organization and costs pertaining to estimated future obligations for non-cancelable lease payments for
an excess facility in Germany. In the fourth quarter of fiscal 2005, a provision adjustment of $0.1 million was made related to the third quarter of fiscal 2005 restructuring plan as severance
and benefits were lower than originally anticipated. The Company does not expect to incur any further charges in connection with this restructuring plan.

Second Quarter of Fiscal 2005 Restructuring Plan:In the second quarter of fiscal 2005, the Company
initiated certain actions to consolidate duplicative resources in connection with the acquisition of Snap Appliance, primarily in selling, marketing and administrative functions, and recorded a
restructuring charge of $0.7 million. The Company does not expect to incur any further charges in connection with this restructuring plan. For the acquisition-related restructuring plan
associated with the Snap Appliance acquisition, please see Note 2 for further details.

First Quarter of Fiscal 2005 Restructuring Plan:In the first quarter of fiscal 2005, the Company
initiated certain actions to consolidate certain development and administrative functions in the United States and Europe, which were completed in the first half of fiscal 2005. The Company recorded a
restructuring charge of $0.8 million in the first quarter of fiscal 2005 related to the involuntary termination of employees and the costs pertaining to estimated future obligations for
non-cancelable lease payments for an excess facility in the United Kingdom. Additional charges of $1.4 million related to this plan associated with

F-33

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severance
and benefits for employees primarily in the area of research and development were taken in the second quarter of fiscal 2005. In the third quarter of fiscal 2005, a provision adjustment of
$0.1 million was made related to the first quarter of fiscal 2005 restructuring plan as severance and benefits were lower than originally anticipated. Restructuring charges related to the first
quarter restructuring plan total $2.1 million. The Company does not expect to incur any further charges in connection with this restructuring plan.

The
following table sets forth an analysis of the components of the fiscal 2005 restructuring charge and the provision adjustment and payments made against the reserve through
March 31, 2005:

|                                  |  | Severance And
Benefits |        | Other Charges |   | Total |  
|--------------------------------- |  | ---------------------- | ------ | ------------- | - | ----- | -
|
|Restructuring provision:          |  |                        |        |               |   |       |  
|Q1'05 Restructuring Plan          |  | $                      | 1,657  |               | $ | 540   |  
|Q2'05 Restructuring Plan          |  |                        | 700    |               |   |      |  
|Q3'05 Restructuring Plan          |  |                        | 2,286  |               |   | 102   |  
|Q4'05 Restructuring Plan          |  |                        | 505    |               |   |      |  
|                                  |  |                        |        |               |   |       |  
|Total                             |  |                        | 5,148  |               |   | 642   |  
|Provision adjustment              |  |                        | (229   | )             |   |      |  
|Cash paid                         |  |                        | (4,023 | )             |   | (234  | )
|Non-cash charges                  |  |                        |       |               |   | (109  | )
|                                  |  |                        |        |               |   |       |  
|Reserve balance at March 31, 2005 |  | $                      | 896    |               | $ | 299   |  
|                                  |  |                        |        |               |   |       |  

The
Company anticipates that the remaining restructuring reserve balance of $1.2 million will be substantially paid out by the third quarter of fiscal 2006.

Fiscal 2004 Restructuring Plans

In the fourth, third and second quarters of fiscal 2004, the Company's management implemented restructuring plans (collectively called the fiscal 2004
restructuring provision) to consolidate primarily research and development resources, the involuntary termination of certain technical support, marketing and administrative personnel, the shutdown of
the Company's Hudson, Wisconsin facility, and asset impairments associated with the identification of duplicative assets and facilities. As a result, the Company recorded a restructuring charge of
$3.7 million, of which $3.3 million related to severance and benefits of 30 employees. The Company recorded an adjustment to the fiscal 2004 restructuring provision of
$0.2 million in fiscal 2005 as a reduction to severance and benefits as actual results were lower than anticipated, offset by an adjustment of $0.6 million in fiscal 2004 related to the
additional lease costs. As of March 31, 2005, the Company has utilized approximately all of these charges and the plan is materially complete.

Fiscal 2003 Restructuring Plan

In the fourth and second quarters of fiscal 2003, the Company announced restructuring programs (collectively called the fiscal 2003 restructuring provision) to
reduce expenses and streamline operations

F-34

---



and
recorded a restructuring charge of $13.2 million. During fiscal years 2004 and 2003, the Company recorded adjustments to the fiscal 2003 restructuring provision of $0.2 million and
$0.1 million, respectively, related to the reduction to severance and benefits as actual results were lower than anticipated, offset by additional lease costs. As of March 31, 2004, the
Company had substantially completed its execution of the fiscal 2003 restructuring provision. As of March 31, 2005, the remaining accrual balance of $0.1 million relates to the estimated
loss related to facility in Florida through April 2008, the end of the lease term.

Fiscal 2002 Restructuring Plan

In the fourth and first quarters of fiscal 2002, the Company's management implemented restructuring plans (collectively called the fiscal 2002 restructuring
provision) to reduce costs, improve operating efficiencies and tailor the Company's expenses to current revenues and recorded a restructuring charge of $10.1 million. During fiscal years 2004,
2003 and 2002, the Company recorded adjustments to the fiscal 2002 restructuring provision of $0.2 million, $0.6 million and $0.4 million, respectively, related to the additional
lease costs offset by a reduction to severance and benefits as actual results were lower than anticipated. As of March 31, 2004, the Company had substantially completed its execution of the
fiscal 2002 restructuring provision. As of March 31, 2005, the remaining accrual balance of $0.3 million related to the estimated loss of two facilities in Florida and Belgium through
the end of the lease term, which are April 2008 and October 2005, respectively.

Fiscal 2001 Restructuring Plan

In the fourth quarter of fiscal 2001, the Company's management implemented a restructuring plan (the fiscal 2001 restructuring provision) in response to the
economic slowdown to reduce costs and improve operating efficiencies and recorded a restructuring charge of $9.9 million. During fiscal years 2003 and 2002, the Company recorded additional
charges of $0.7 million and $0.3 million, respectively, related to additional lease costs and the write-off of certain manufacturing equipment that was being held for sale,
which was offset by a reduction to severance and benefits as actual results were lower than anticipated. As of March 31, 2004, the Company substantially completed its execution of the 2001
restructuring provision. The remaining accrual balance relates to the estimated loss of a facility that the Company subleased in California through April 2008, the end of the lease term. The
estimated loss represents the estimated future obligations for the non-cancelable lease payments, net of the estimated future sublease income. In fiscal 2005, the Company recorded
additional charges of $0.5 million related to additional lease costs. As of March 31, 2005, the Company anticipates that the remaining restructuring reserve balance relating to lease
obligations of $1.0 million will be substantially paid out by the first quarter of fiscal 2009.

F-35

---



The
following table sets forth the activity in the accrued restructuring balances related to the fiscal years 2003, 2002 and 2001 restructuring plans for lease obligations at
March 31, 2005:

|                                  |  | FY 2003
Restructuring
Plan |     | FY 2002
Restructuring
Plan |   | FY 2001
Restructuring
Plan |   | Total |     
|--------------------------------- |  | -------------------------- | --- | -------------------------- | - | -------------------------- | - | ----- | ----
|
|Reserve balance at March 31, 2004 |  | $                          | 107 |                            | $ | 802                        |   | $     | 561 
|Provision adjustment              |  |                            |    |                            |   |                           |   |       | 515 
|Cash paid                         |  |                            | (51 | )                          |   | (531                       | ) |       | (110
|                                  |  |                            |     |                            |   |                            |   |       |     
|Reserve balance at March 31, 2005 |  | $                          | 56  |                            | $ | 271                        |   | $     | 966 
|                                  |  |                            |     |                            |   |                            |   |       |     

Note 10. Other Charges (Gains)

Other charges (gains) consist of asset impairment charges related to certain properties classified as assets held for sale in fiscal 2004 and subsequently sold in
fiscal 2005 and minority investments. Other charges (gains) also included charges associated with the Company's strategic alliances with ServerEngines LLP ("ServerEngines") and Vitesse. The Company
recorded a gain on the sale of assets of $0.3 million in fiscal 2005 and asset impairment charges of $6.0 million and $1.5 million in fiscal years 2004 and 2003, respectively.

On
March 16, 2005, the Company entered into a strategic alliance with ServerEngines, to develop and market the next generation IP storage products. Under the terms of the
alliance, ServerEngines employed 33 of the Company's former engineering employees and licensed certain technology and acquired certain assets related to the Company's iSCSI and TCP/IP offload protocol
engines. On January 26, 2005, the Company entered into a strategic alliance with Vitesse Semiconductor Corporation to develop and market the next generation SAS products. Under the terms of the
alliance, Vitesse employed 44 of the Company's former engineering employees and licensed certain SAS technology and assets related to the Company's development of SAS ROC products. As a result, the
Company incurred charges in fiscal 2005 of $0.9 million and $1.6 million for severance, benefits, loss on the sale of property and equipment and legal fees associated with the
ServerEngines and Vitesse alliances, respectively.

In
fiscal 2004, the Company recorded an impairment charge of $5.0 million to reduce the carrying value of certain properties classified as assets held for sale to fair value less
cost to sell. The Company decided to consolidate its properties in Milpitas, California to better align its business needs with existing operations and to provide more efficient use of its facilities.
As a result, two owned buildings, including associated building improvements and property, plant and equipment, were classified as assets held for sale and were included in "Other current assets" in
the Consolidated Balance Sheets at
March 31, 2004 at their expected fair value less expected cost to sell. In October 2004, the Company completed the sale of these properties that were previously classified as held for
sale. Net proceeds from the sale of the properties aggregated $9.6 million, which exceeded the Company's final revised fair value of $6.8 million. As a result, a gain on the sale of the
properties of $2.8 million was recorded in fiscal 2005 as a credit to "Other charges (gains)" in the Consolidated Statements of Operations.

The
Company holds minority investments in certain non-public companies. The Company regularly monitors these minority investments for impairment and records reductions in the
carrying values when necessary. Circumstances that indicate an other-than-temporary decline include valuation ascribed to the

F-36

---



issuing
company in subsequent financing rounds, decreases in quoted market price and declines in operations of the issuer. The Company recorded an impairment charge of $1.0 million and
$1.5 million in fiscal years 2004 and 2003, respectively, related to a decline in the values of minority investments deemed to be other-than-temporary. A portion of the
write-off in fiscal 2003 of $0.5 million related to the Company's investment in Chapparal, a related party transaction. The Company and Chaparral also were parties to various
component supply, technology and software licensing and product distribution agreements. During fiscal 2003, the Company recorded royalty and product revenue of $0.3 million. There were no
further transactions with Chaparral subsequent to fiscal 2003 due to a severe curtailment of Chapparal's operations.

Note 11. Net Income (Loss) Per Share

Basic net income (loss) per share is computed by dividing net income (loss) by the weighted average number of common shares outstanding during the period. Diluted
net income (loss) per share gives effect to all potentially dilutive common shares outstanding during the period, which include certain stock options and warrants, calculated using the treasury stock
method, and convertible notes which are potentially dilutive at certain earnings levels, and are computed using the if-converted method.

A
reconciliation of the numerator and denominator of the basic and diluted net income (loss) per share computations was as follows:

|                                                                                   |  | Years Ended March 31, |         
|---------------------------------------------------------------------------------- |  | --------------------- | --------
|
|
|Numerator:                                                                         |  |                       |         
|Income (loss) from continuing operations                                           |  | $                     | (145,106
|Adjustment for interest expense on 3/4% Notes, net of taxes                        |  |                       |        
|Adjustment for interest expense on 3% Notes, net of taxes                          |  |                       |        
|                                                                                   |  |                       |         
|Net income (loss)                                                                  |  | $                     | (145,106
|                                                                                   |  |                       |         
|Denominator:                                                                       |  |                       |         
|Weighted average shares outstanding  basic                                        |  |                       | 110,798 
|Effect of dilutive securities:                                                     |  |                       |         
|Employee stock options and other                                                   |  |                       |        
|3/4% Notes                                                                         |  |                       |        
|3% Notes                                                                           |  |                       |        
|                                                                                   |  |                       |         
|Weighted average shares and potentially dilutive common shares outstandingdiluted |  |                       | 110,798 
|                                                                                   |  |                       |         
|Net income (loss) per share:                                                       |  |                       |         
|Basic                                                                              |  | $                     | (1.31   
|Diluted                                                                            |  | $                     | (1.31   

Diluted
loss per share for fiscal years 2005 and 2003 was based only on the weighted-average number of shares outstanding during each of the periods, as the inclusion of any common stock
equivalents would have been anti-dilutive. In addition, certain potential common shares were excluded from the diluted

F-37

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computation
for fiscal 2004 because their inclusion would have been anti-dilutive. The items excluded for fiscal years 2005, 2004 and 2003 were as follows:

|                                     |  | Years Ended March 31,
|------------------------------------ |  | ---------------------
|
|
|Outstanding employee stock options   |  | 15,498               
|Warrants(1)                          |  | 19,874               
|43/4% Convertible Subordinated Notes |  |                     
|3% Notes                             |  | 2,298                
|3/4% Notes                           |  | 19,224               

---

The
Company adopted EITF 04-08 in fiscal 2005, which required the inclusion of shares related to contingently convertible debt instruments for computing diluted earnings per
share using the if-converted method, regardless of whether market price contingency has been met. As a result of applying EITF 04-08 to fiscal 2004, diluted earnings per share
were $0.53 rather than $0.54 as previously reported. There was no effect to earnings per share for fiscal 2003 with the adoption of EITF 04-08.

Note 12. Stockholders' Equity

Employee Stock Purchase Plan:The Company has authorized 10,600,000 shares of common stock for issuance under the 1986 ESPP.
Qualified employees may elect to have a certain percentage (not to exceed 10%) of their salary withheld pursuant to the ESPP. The salary withheld is then used to purchase shares of the Company's
common stock at a price equal to 85% of the market value of the common stock at either the beginning of the offering period or at the end of each applicable six month purchase period, whichever is
lower. During fiscal 2001, the Company amended the ESPP to extend the offering period from six months to 24 months, beginning in August 2000. Purchases are made every six months. During
fiscal 2004, an additional 5,000,000 shares were added to the ESPP, making a total of 15,600,000 authorized shares under the 1986 ESPP. Under the ESPP, 1,109,000, 1,027,000 and 1,163,000 shares
were issued during fiscal years 2005, 2004 and 2003, respectively, representing approximately $5.4 million, $5.3 million and $6.0 million in employees' contributions,
respectively.

2004 Equity Incentive Plan:During the second quarter of fiscal 2005, the Company's Board of Directors and its stockholders
approved the Company's 2004 Equity Incentive Plan and reserved for issuance thereunder 10,000,000 shares of the Company's common stock plus shares reserved but not issued under the Company's 1999
Stock Option Plan and 2000 Nonstatutory Stock Option Plan. The 2004 Equity Incentive Plan provides for granting of nonstatutory stock options, restricted stock, stock awards, restricted stock units
and stock appreciation rights to employees, employee directors and consultants. Incentive stock options may also be granted to the Company's employees under the 2004 Equity Incentive Plan. As of
March 31, 2005, the Company had 14,091,193 shares available for future issuance under the 2004 Equity Incentive Plan.

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2000 Nonstatutory Stock Option Plan:During the third quarter of fiscal 2001, the Company's Board of Directors approved the
Company's 2000 Nonstatutory Stock Option Plan and reserved for issuance thereunder 8,000,000 shares of common stock. The 2000 Nonstatutory Stock Option Plan provides for granting of stock options to
non-executive officer employees of the Company at prices equal to at least 100% of the fair market value at the date of grant. Stock options granted under this plan are for periods not to
exceed ten years and generally become fully vested and exercisable over a two to five-year period. Upon stockholder approval of the 2004 Equity Incentive Plan in August 2004, the
2000 Nonstatutory Stock Option Plan was terminated with respect to new option grants. There were no shares available for option grants under the 2000 Nonstatutory Stock Option Plan as of
March 31, 2005.

1999 Stock Option Plan:During the second quarter of fiscal 2000, the Company's Board of Directors and its stockholders
approved the Company's 1999 Stock Option Plan and reserved for issuance thereunder (a) 1,000,000 shares of common stock, plus (b) any shares of common stock reserved but ungranted under
the Company's 1990 Stock Option Plan as of the date of stockholder approval, plus (c) any shares returned to the 1990 Stock Option Plan as a result of termination of options under the 1990
Stock Option Plan after the date of stockholder approval of the 1999 Stock Option Plan. The 1999 Stock Option Plan provided for granting of incentive and nonstatutory stock options to employees,
consultants and directors of the Company. Options granted under this plan are for periods not to exceed ten years, and were granted at prices not less than 100% and 75% for incentive and nonstatutory
stock options, respectively, of the fair market value on the date of grant. Generally, stock options become fully vested and exercisable over a four to five-year period. Upon stockholder
approval of the 2004 Equity Incentive Plan in August 2004, the 1999 Stock Option Plan was terminated with respect to new option grants. There were no shares available for option grants under
the 1999 Stock Option Plan at March 31, 2005.

1990 Stock Option Plan:The Company's 1990 Stock Option Plan allowed the Board of Directors to grant to employees, officers,
and consultants incentive and nonstatutory options to purchase common stock or other stock rights at exercise prices not less than 50% of the fair market value of the underlying common stock on the
date of grant. The expiration of options or other stock rights did not exceed ten years from the date of grant. The Company has issued all stock options under this plan at exercise prices of at least
100% of fair market value of the underlying common stock on the respective dates of grant. Generally, options vest and become exercisable over a four-year period.
In March 1999, the Company amended the 1990 Stock Option Plan to permit non-employee directors of the Company to participate in this plan. Upon stockholder approval of the 1999
Stock Option Plan, the 1990 Stock Option Plan was terminated with respect to new option grants. There were no shares available for option grants under the 1990 Stock Option Plan at March 31,
2005.

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Assumed Stock Option Plans:The Company assumed the stock option plans and the outstanding stock options of certain acquired
companies, which include Snap Appliance in fiscal 2005, Eurologic in fiscal 2004, Platys in fiscal 2002 and DPT in fiscal 1999. No further options may be granted under these assumed plans.

Option
activity under the Company's stock option plans during fiscal years 2003, 2004 and 2005 was as follows:

Options OutstandingOptions
Available

Shares

Weighted Average Exercise PriceBalance, March 31, 2002

8,889,293

17,213,155

$
12.91Granted

(5,632,090
)
5,632,090


8.42Exercised



(475,875
)

2.74Forfeited



(78,506
)

0.32Cancelled

3,190,207

(3,190,207
)

14.17Balance, March 31, 2003

6,447,410

19,100,657


11.69Assumed



498,789


7.41Granted

(4,530,400
)
4,530,400


7.89Exercised



(895,199
)

2.51Forfeited



(242,249
)

6.59Cancelled

3,046,688

(3,046,688
)

12.33Balance, March 31, 2004

4,963,698

19,945,710


11.09Authorized

10,000,000




Assumed



1,232,489


1.50Granted

(4,243,400
)
4,243,400


7.52Restricted Stock Issued

(14,900
)



Exercised



(1,401,267
)

2.11Forfeited



(194,640
)

7.98Cancelled

3,385,795

(3,385,795
)

11.57Balance, March 31, 2005

14,091,193

20,439,897

$
10.34Options exercisable at:March 31, 2003



11,471,643

$
13.19March 31, 2004



12,661,660


12.81March 31, 2005



13,036,572


11.85


F-40

---



The
following table summarizes information about the employees' stock option plans as of March 31, 2005:

Options OutstandingWeighted
Average
Remaining
Contractual
Life



Options ExercisableRange of Exercise Prices

Number
Outstanding
at 3/31/05

Weighted
Average
Exercise Price

Number
Exercisable
at 3/31/05

Weighted
Average
Exercise Price$  0.10-$  5.00

2,366,029

5.42

$
3.53

1,400,555

$
3.67$  5.06-$10.00

8,250,431

5.33


7.69

2,458,874


7.48$10.18-$15.00

5,440,152

3.98


12.84

4,817,611


12.80$15.13-$20.00

4,266,315

3.69


15.54

4,242,563


15.54$20.18-$3,473.67

116,970

3.70


28.85

116,969


28.8220,439,897

4.63


10.34

13,036,572


11.85


Stock Option PlansDirectors

The 2000 Director Stock Option Plan:During the second quarter of fiscal 2001, the Company's Board of Directors approved the
Company's 2000 Director Stock Option Plan and reserved for issuance thereunder 1,000,000 shares of common stock. The 2000 Director Stock Option Plan provides for the automatic grant to
non-employee directors of nonstatutory stock options to purchase
common stock at the fair market value of the underlying common stock on the date of grant, which is generally the last day of each fiscal year except for the first grant to any newly elected director.
Upon joining the Board of Directors, each new non-employee director receives an option to purchase 40,000 shares of the Company's common stock which vests over four years and expires ten
years after the date of grant. On the last day of each fiscal year, each non-employee director receives an option to purchase 15,000 shares of the Company's common stock which vests over a
one-year period and expires ten years after the date of grant. As of March 31, 2005, the Company had 378,750 shares available for future issuance under the 2000 Director Stock
Option Plan.

The 1990 Directors' Stock Option Plan:The 1990 Directors' Stock Option Plan provides for the automatic grant to
non-employee directors of non-statutory stock options to purchase common stock at the fair market value of the underlying common stock on the date of grant, which is generally
the last day of each fiscal year except for the first grant to any newly elected director. Upon joining the Board of Directors, each new non-employee director received an option to
purchase 40,000 shares of the Company's common stock which vests over four years and, prior to March 31, 1997, expired five years after the date of grant. Prior to March 31, 1997, each
director received a grant at the end of each fiscal year for 10,000 shares, which vested quarterly and over a four-year period and expired five years after the date of grant. During fiscal
1997, the Company amended the 1990 Directors' Stock Option Plan such that all newly issued options expire ten years after the date of grant and all newly issued annual options vest over a
one-year period. In fiscal 1999, the Company amended the 1990 Directors' Stock Option Plan to increase the annual grant to 15,000 options for the fiscal year ended March 31, 1999.
Upon the approval of the 2000 Director Stock Option Plan, the 1990 Director Option Plan was terminated with respect to new grants. There were no shares available for option grants under the 1990
Directors' Stock Option Plan at March 31, 2005.

F-41

---



Option
activity under the directors' stock option plans during fiscal years 2003, 2004 and 2005 was as follows:

Options OutstandingOptions
Available

Shares

Weighted Average Exercise PriceBalance, March 31, 2002

652,500

510,000

$
21.05Granted

(120,000
)
120,000


6.11Exercised






Cancelled






Balance, March 31, 2003

532,500

630,000


18.21Granted

(160,000
)
160,000


8.74Exercised



(3,750
)

6.11Forfeited



(35,000
)

34.13Cancelled

41,250

(41,250
)

9.68Balance, March 31, 2004

413,750

710,000


15.85Granted

(105,000
)
105,000


4.58Exercised



(15,000
)

6.11Cancelled

70,000

(70,000
)

11.00Balance, March 31, 2005

378,750

730,000


14.89Options exercisable at:March 31, 2003



402,500

$
22.89March 31, 2004



482,500


18.42March 31, 2005



575,000


17.05


The
following table summarizes information about the directors' stock option plans as of March 31, 2005:

Options OutstandingOptions ExercisableWeighted Average Remaining Contractual LifeRange of Exercise Prices

Number
Outstanding
at 3/31/05

Weighted Average Exercise Price

Number
Exercisable
at 3/31/05

Weighted
Average
Exercise Price$  4.58-$10.00

385,000

8.7

$
6.98

252,500

$
7.81$10.01-$20.00

210,000

6.8


14.27

187,500


14.10$20.01-$30.00

30,000

3.0


20.06

30,000


20.06$30.01-$40.00

20,000

2.0


37.25

20,000


37.25$40.01-$49.38

85,000

3.8


45.17

85,000


45.17730,000

7.1


14.89

575,000


17.05


Assumptions of Fair Value

Pro forma information regarding net income (loss) and net income (loss) per share is required to be determined as if the Company had accounted for the options
granted pursuant to its ESPP, employees'

F-42

---



stock
option plans, and directors' stock option plans, collectively called "options," under the fair value method as required by SFAS No. 123. The pro forma information for fiscal years 2005,
2004 and 2003 is reported in Note 1 "Summary of Significant Accounting Policies." The fair value of options granted in fiscal years 2005, 2004 and 2003 as reported was estimated at the date of
grant using the Black-Scholes valuation model with the following weighted average assumptions:

ESPP

Employees' Stock
Option Plans

Directors' Stock
Option Plans2005

2004

2003

2005

2004

2003

2005

2004

2003Expected life (in years)

1.2

1.4

0.5

2.3

2.7

4

1.0

1.4

5Risk-free interest rate

2.6
%
1.5
%
1.1
%
3.1
%
1.8
%
2.4
%
3.4
%
1.3
%
2.8
%Expected volatility

40
%
60
%
76
%
44
%
62
%
76
%
34
%
43
%
78
%Dividend yield




















The
following table states the weighted average estimated fair value of its options granted or issued for all periods presented:

2005

2004

2003(per share amounts)ESPP

$
6.11

$
2.77

$
2.39Employees' stock option plans

$
2.18

$
3.17

$
5.16Directors' stock option plans

$
0.68

$
1.82

$
3.92


Warrants

In January 2000, the Company issued a warrant to Agilent Technologies, Incorporated ("Agilent") to purchase 1,160,000 shares of the Company's common stock
at $62.25 per share. The warrant had a term of four years from the date of issuance, was immediately exercisable and was valued at $37.1 million using the Black-Scholes valuation model. As a
result of the Roxio spin-off, which is now known as Napster, the Company retained 190,936 shares of Roxio's common stock, in the
event that Agilent exercised its warrant to purchase 1,160,000 shares of the Company's common stock; however, the warrant expired unexercised in January 2004.

In
December 1998, the Company received a warrant to purchase up to 982,357 shares of BroadLogic's common stock, a related party, at $4 per share, which expired in
December 2003.

Rights Plan

The Company has reserved 250,000 shares of Series A Preferred Stock for issuance under the 1996 Rights Agreement, which was amended and restated on
February 1, 2001. Under this plan, stockholders have received one preferred stock purchase right ("Right") for each outstanding share of the Company's common stock. The Rights trade
automatically with shares of the Company's common stock. The Rights are not exercisable until ten days after a person or group announces the acquisition of 20% or more of the Company's outstanding
common stock or the commencement of a tender offer which would result in ownership by a person or group of 20% or more of the then outstanding common stock. If one of these events occurs,
stockholders, other than an acquiring person, would be entitled to exercise their rights and

F-43

---



receive
one-thousandth of a share of Series A Preferred Stock for each Right they hold at an exercise price of $180.00 per right.

The
Company is entitled to redeem the Rights at $0.01 per Right anytime on or before the day following the occurrence of an acquisition or tender offer described in the preceding
paragraph. This redemption period may be extended by the Company in some cases. If, prior to such redemption, the Company is acquired in a merger or other business combination, a party acquires 20% or
more of the Company's common stock, a 20% stockholder engages in certain self-dealing transactions, or the Company sells 50% or more of its assets, then in lieu of receiving shares of
Series A Preferred Stock for each Right held, stockholders, other than an acquiring person, would be entitled to exercise their Rights and receive from the surviving corporation, for an
exercise price of $180.00 per right, common stock having a then current market value of $360.00.

The
Series A Preferred Stock purchasable upon exercise of the Rights will not be redeemable. Each share of Series A Preferred Stock will be entitled to an aggregate
dividend of 1,000 times the dividend declared per common stock. In the event of liquidation, the holders of the Series A Preferred Stock will be entitled to a preferential liquidation payment
equal to 1,000 times the per share amount to be distributed to the holders of the common stock. Each share of Series A Preferred Stock will have 1,000 votes, voting together with the common
stock. In the event of any merger, consolidation or other transaction in which the common stock is changed or exchanged, each share of Series A Preferred Stock
will be entitled to receive 1,000 times the amount received per common stock. These rights are protected by customary anti-dilution provisions.

Shares Reserved for Future Issuance

As of March 31, 2005, the Company has reserved the following shares of authorized but unissued common stock:

ESPP

5,694,287Employees' stock option plans

34,531,090Directors' stock option plans

1,108,750Outstanding warrants (Notes 5, 6 and 13)

19,874,203Conversion of 3/4% Notes (Note 6)

19,224,203Conversion of 3% Notes (Note 6)

2,298,199Total

82,730,732


Note 13. IBM Distribution Agreement, ServeRAID Agreement and Patent Cross-License Agreement

In December 2004, the Company entered into a distribution agreement on its RAID controllers and connectivity products sold for IBM iSeries and pSeries
servers. The agreement was made through an amendment to the Company's existing i/p Series RAID supply and intellectual property agreement entered into in June 2004 (See Note 2). The
distribution agreement is accounted for as a standalone transaction as it was not contemplated at the time the Company entered into the original IBM i/p Series RAID transaction.

Under
the amended intellectual property agreement, the Company is required to make fixed and variable royalty-based payments to IBM. The fixed payments potentially due under the
arrangement total

F-44

---



$52.1 million,
of which $25.0 million was paid in December 2004, the date the Company entered into the agreement, and the remainder is due quarterly, in varied installments,
through December 2008. A portion of the $52.1 million in total payments is contingent upon IBM purchasing certain levels of the Company's products. Upon entering into the agreement, the
Company recorded the full remaining amount payable to IBM as a liability in the Consolidated Balance Sheets as the Company considers payment of the full amount to be probable. At March 31,
2005, $11.6 million was recorded in "Accrued Liabilities" and $11.9 million was recorded in "Other Long-Term Liabilities" in the Consolidated Balance Sheets.

The
fixed consideration for the distribution agreement of $52.1 million was recorded as an asset to "Prepaid expenses" and "Other long-term assets" in the Consolidated
Balance Sheets and the amortization is being included in "Net revenues" in the Consolidated Statements of Operations over a four-year period, reflecting the pattern in which the economic
benefits of the assets expected to be realized. The royalty-based fee per unit is calculated using the average net sales price for units sold within the quarter and baseline royalty rates subject to
certain adjustment factors. The amortization of the fixed consideration and the royalty-based payments are being recorded as a reduction to revenue in the period the units are sold.

In
March 2002, the Company entered into a non-exclusive, perpetual technology licensing agreement and an exclusive three-year product supply agreement with
IBM. The technology licensing agreement grants the Company the right to use IBM's ServeRAID technology for the Company's internal and external RAID products. Under the product supply agreement, the
Company will supply RAID software, firmware and hardware to IBM for use in IBM's xSeries servers. The agreement does not contain minimum purchase commitments from IBM and the Company cannot be assured
of the future revenue it will receive under this agreement. Either party may terminate the technology licensing agreement if the other party materially breaches its obligations under the agreement.
The product supply agreement automatically terminates at the end of three years or earlier upon breach of a material contract obligation by the Company or upon the occurrence of any transaction within
two years of the effective date of the agreement that results in: (i) a competitor of IBM beneficially owning at least 10% of the voting stock of the Company or any affiliate of the Company;
(ii) a competitor of IBM becoming entitled to appoint a nominee to the board of directors of the Company; or (iii) a director, office holder or employee of a competitor of IBM becomes a
director of the Company.

In
consideration, the Company paid IBM a non-refundable fee of $26.0 million and issued IBM a warrant to purchase 150,000 shares of the Company's common stock at an
exercise price $15.31 per share. The warrant has a term of five years from the date of issuance and is immediately exercisable. The warrant was valued at approximately $1.0 million using the
Black-Scholes valuation model using a volatility rate of 71.6%, a risk-free interest rate of 4.7% and an estimated life of five years. The Company allocated $12.0 million of the
consideration paid to IBM to the supply agreement and allocated the remainder to the technology license fee. Fair values were determined based on discounted estimated future cash flows related to the
Company's channel and OEM ServeRAID business. The cash flow periods used were five years and the discount rates used were 15% for the supply agreement asset and 20% for the technology license fee
based upon the Company's estimate of their respective levels of risk. Amortization of the supply agreement and the technology license fee shall be included in "Net revenues" and "Costs of revenues,"
respectively, over a five-year period reflecting the pattern in which economic benefits of the assets are realized.

F-45

---



In
May 2000, the Company entered into a patent cross-license agreement with IBM, which was subsequently amended in March 2002. Under the agreement, the Company obtained a
release of past infringement claims made prior to January 1, 2000 and received the right to use certain IBM patents from January 1, 2000 through June 30, 2007. Additionally, the
Company granted IBM a license to use all of the Company's patents for the same period. In consideration, the Company paid an aggregate patent fee of $13.3 million. The patent license fee is
being amortized over the period from January 1, 2000 through June 30, 2007.

Note 14. Income Taxes

The components of income (loss) from operations before provision for (benefit from) income taxes for all periods presented were as follows:

Years Ended March 31,2005

2004

2003(in thousands)Income (Loss) Before Taxes:Domestic

$
(80,392
)
$
17,360

$
(34,306
)Foreign


(12,027
)

12,574


16,612$
(92,419
)
$
29,934

$
(17,694
)


The
components of the provision for (benefit from) income taxes for all periods presented were as follows:

Years Ended March 31,2005

2004

2003(in thousands)Federal:Current

$
978

$
(297
)
$
(4,234
)Deferred


42,394


(13,029
)

(4,151
)43,372


(13,326
)

(8,385
)Foreign:Current


3,017


(8,074
)

1,776Deferred


(215
)

50


1,8792,802


(8,024
)

3,655State:Current


(2,047
)

0


3,234Deferred


8,560


(11,623
)

(772
)6,513


(11,623
)

2,462Provision for (benefit from) income taxes

$
52,687

$
(32,973
)
$
(2,268
)


The
tax benefit associated with dispositions from employees' stock plans were $0.6 million, $0.6 million, and $1.1 million in fiscal years 2005, 2004 and 2003,
respectively. To the extent that these

F-46

---



amounts
reduce taxes currently paid, the benefit is recorded directly to stockholders' equity. The benefits associated with dispositions from employee stock option plans are not currently recognized
to the extent that the resulting tax deduction creates a net operating loss carryforward. These benefits will be recorded directly to stockholders' equity when the net operating loss carryforward is
realized.

Significant
components of the Company's deferred tax assets and liabilities at March 31, 2005 and 2004 were as follows:

March 31,2005

2004(in thousands)Intangible technology

$
27,482

$
23,134Research and development tax credits


12,362


8,714Net operating loss carryover


12,106


Compensatory accruals


5,376


5,488Capitalized research and development


3,932


3,590Cost sharing buy-out


3,038


Fixed asset accrual


3,008


8,108Restructuring charges


2,059


1,059Foreign tax credits


1,912


401Inventory reserves


1,838


2,592Other expense accruals


1,195


3,463Deferred revenue


943


Royalty accrual


781


438Accrued returned materials


746


947Uniform capitalization adjustment


554


500Other, net


1,281


128Gross deferred tax assets


78,613


58,562Deferred tax liabilities:Acquisition-related charges


(11,081
)

(2,341
)Cumulative translation adjustment


(834
)

(543
)Gross deferred tax liability


(11,915
)

(2,884
)Valuation allowance


(67,167
)

Net deferred tax assets (liabilities)

$
(469
)
$
55,678


The
valuation allowance for deferred tax assets was recorded at March 31, 2005 as the Company determined that it was more likely than not that its U.S. deferred tax assets would
not be realized. The Company continuously monitors the circumstances impacting the expected realization of its deferred tax assets on a jurisdiction by jurisdiction basis. At March 31, 2005,
the Company's analysis of its deferred tax assets demonstrated that it was more likely than not that all of its U.S. deferred tax assets would not be realized. Factors that led to this conclusion
included, but were not limited to, the Company's past operating results, cumulative tax losses in the U.S., and uncertain future income on a jurisdiction by jurisdiction basis. The estimates of
expected future income were negatively impacted by increased costs related to recent acquisitions and business alliances that occurred in fiscal 2005. These additional costs, along with industry
technology transitions, place significant risk on the Company's ability to achieve and maintain

F-47

---



profitability
and therefore have adversely impacted the profitability forecasts initially used to release the valuation allowance in fiscal 2004.

The
Company's effective tax rate differed from the federal statutory tax rate for all periods presented as follows:

Years Ended March 31,2005

2004

2003Federal statutory rate

(35.0
)%
35.0
%
(35.0
)%State taxes, net of federal benefit

7.0
%
(16.9
)%
9.0
%Foreign subsidiary income at other than the U.S tax rate

8.7
%
(6.5
)%
(16.6
)%Change in valuation allowance

64.2
%
(72.2
)%
(19.1
)%Reduction in tax reserves

(24.7
)%
(21.0
)%
Acquisition charges

20.6
%
(19.4
)%
75.0
%Repatriation

19.0
%


Research and development credits

(3.0
)%
(9.4
)%
(31.6
)%Other

0.2
%
0.2
%
5.5
%Effective income tax rate

57.0
%
(110.2
)%
(12.8
)%


The
Company's subsidiary in Singapore is currently operating under a tax holiday. The Company has agreed to terms for a new tax holiday package effective for fiscal years 2005 through
2010. The new tax holiday will provide that profits derived from certain products will be exempt from tax, subject to certain conditions.

In
the fourth quarter of fiscal 2005, the Company repatriated $360.6 million of undistributed earnings from Singapore to the United States, resulting in a tax liability of
$17.6 million. The one-time deduction is allowed to the extent that the repatriated amounts are used to fund a qualified Domestic Reinvestment Plan, as required by the Act. If the
Company does not spend the repatriated funds in accordance with its reinvestment plan, the Company may incur additional tax liabilities. The Company has not provided for U.S. deferred income taxes or
foreign withholding taxes on the remaining undistributed earnings of $255.6 million since these earnings are intended to be reinvested indefinitely. Although the Company does not have any
current plans to repatriate the remaining undistributed earnings from its Singapore subsidiary to its United States parent company, if the Company were to do so, additional income taxes at the
combined United States Federal and state statutory rate of approximately 40% could be incurred from the repatriation.

The
Company's tax related liabilities were $57.5 million and $65.8 million at March 31, 2005 and 2004, respectively. Tax related liabilities are primarily composed
of income, withholding and transfer taxes accrued by the Company in the taxing jurisdictions in which it operates around the world, including, but not limited to, the United States, Singapore,
Ireland, United Kingdom, Japan and Germany. The amount of the liability was based on management's evaluation of the Company's tax exposures in light of the complicated nature of the business
transactions entered into by the Company in a global business environment. In fiscal years 2005 and 2004, net tax related liabilities were released totaling $26.4 million and
$6.3 million, respectively, as the result of favorable outcomes of certain U.S. tax controversies. The Company also continuously reviews its tax related liabilities to ensure that it is
appropriate by considering tax controversy factors such as the period covered by the cause of action, the degree of probability of an

F-48

---



unfavorable
outcome, its ability to reasonably estimate the liability, the timing of the liability and how it will impact the Company's other tax attributes. At March 31, 2005, the Company
believed that the tax related liability recorded on its Consolidated Balance Sheet was sufficient.

Note 15. Commitments and Contingencies

The Company leases certain land, office facilities, vehicles, and equipment under operating lease agreements that expire at various dates through fiscal 2028. As
of March 31, 2005, future minimum lease payments and future sublease income under non-cancelable operating leases and subleases were as follows:

Fiscal Year:

Future Minimum Lease Payments

Future Sublease Income(in thousands)2006

$
8,554

$
3,9002007


6,621


3,2222008


5,540


2,0422009


2,622


1352010


2,261


2011 and thereafter


11,935


Total

$
37,533

$
9,299


Net
rent expense was approximately $3.1million, $2.6 million and $3.1 million during fiscal years 2005, 2004 and 2003, respectively.

The
Company invests in technology companies through two venture capital funds, Pacven Walden Ventures V Funds and APV Technology Partners II, L.P. At March 31, 2005, the carrying
value of such investments aggregated $3.3 million. The Company has also committed to provide additional funding of up to $0.5 million.

In
connection with the acquisition of Snap Appliance, the Company acquired an available revolving line of credit of up to $7.5 million that bears interest at the greater the
bank's prime rate or 4.25% per annum. At March 31, 2005, the Company had no borrowings against this line. Borrowings are collateralized by certain accounts receivable balances. Under the
amended terms of the line of credit, all financial covenants are waived through the term of the line of credit on April 23, 2005.

On
June 27, 2000, the Company received a statutory notice of deficiency from the IRS with respect to its Federal income tax returns for fiscal 1994 to 1996. The Company filed a
Petition with the United States Tax Court on September 25, 2000, contesting the asserted deficiencies. In December 2001, settlement agreements were filed with the United States Tax Court
reflecting a total of $9.0 million of adjustments and an allowance of $0.5 million in additional tax credits. The outcome did not have a material adverse effect on the Company's
financial position or results of operations, as sufficient tax provisions have been made. The final Tax Court stipulation will be filed when the subsequent audit cycles are completed. Tax credits that
were generated but not used in subsequent years may be carried back to the fiscal 1994 to 1996 audit cycle.

F-49

---



On
December 15, 2000, the Company received a statutory notice of deficiency from the IRS with respect to its Federal income tax return for fiscal 1997. The Company filed a
Petition with the United States Tax Court on March 14, 2001, contesting the asserted deficiencies. Settlement agreements have been filed with the United States Tax Court on all but one issue.
The Company believes that the final outcome of all issues will not have a material adverse impact on its financial position or results of operations, as the Company believes that it has meritorious
defense against the asserted deficiencies and any proposed adjustments and that it has made sufficient tax provisions. However, the Company cannot predict with certainty how these matters will be
resolved and whether it will be required to make additional payments.

In
addition, the IRS is currently auditing the Company's Federal income tax returns for fiscal 1998 through fiscal 2001. In the third quarter of fiscal 2005, the Company resolved all
issues other than the rollover impact of any potential resolution on the remaining fiscal 1997 issue and tax credits that were generated but not used in subsequent years that may be carried back. As a
result of the resolutions, $31.9 million previously recorded as a tax provision was reversed during fiscal 2005. The Company believes that it has provided sufficient tax provisions for these
years and the ultimate outcome of the IRS audits will not have a material adverse impact on its financial position or results of operations in future periods. However, the Company cannot predict with
certainty how these matters will be resolved and whether it will be required to make additional tax payments.

The
Company is a party to other litigation matters and claims, including those related to intellectual property, which are normal in the course of its operations, and while the results
of such litigation matters and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse impact on its financial position
or results of operations.

Note 16. Guarantees

Intellectual Property Indemnification Obligations

The Company has entered into agreements with customers and suppliers that include intellectual property indemnification obligations. These indemnification
obligations generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions.
In each of these circumstances, payment by the Company is conditional on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically
allow the Company to challenge the other party's claims. Further, the Company's obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may
have recourse against third parties for certain payments made by it under these agreements. It is not possible to make a reasonable estimate of the maximum potential amount of future payments under
these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, the Company has not
incurred significant costs to defend lawsuits or settle claims related to such agreements and no amount has been accrued in the accompanying financial statements with respect to these indemnification
guarantees.

Product Warranty

The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales. The estimated future
warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty

F-50

---



obligations
are affected by product failure rates, material usage and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage or replacement costs
differ from the Company's estimates, revisions to the estimated warranty obligations would be required; however the Company made no adjustments to pre-existing warranty accruals in fiscal
years 2005 and 2004. The Company recorded $0.4 million of warranty costs in the third quarter of fiscal 2004 associated with certain claims.

A
reconciliation of the changes to the Company's warranty accrual for fiscal 2005 was as follows:

March 31,2005

2004(in thousands)Balance at beginning of period

$
1,598

$
1,343Warranties assumed


1,045


120Warranties provided


5,846


4,499Actual costs incurred


(6,405
)

(4,364
)Balance at end of period

$
2,084

$
1,598


Note 17. Segment, Geographic and Significant Customer Information

Segment Information

In the second quarter of fiscal 2005 and following the Snap Appliance acquisition in July 2004 (Note 2), the Company refined its internal
organizational structure to operate in three reportable segments: OEM, Channel and DSG. Where historically the Company's former SSG and SNG segment each offered distinct products across its entire
customer base, the new OEM and Channel segments offer an integrated set of products to customers that are specific to the segment. The Company reorganized its business in a customer-focused manner to
enable it to concentrate on addressing the specific business needs of its customers and better coordinate product planning. A description of the types of customers or products and services provided by
each reportable segment is as follows:



F-51

---





In
the third quarter of fiscal 2005, the Company further refined its internal organizational structure such that certain operating expenses previously allocated to segments will now be
separately managed at the corporate level. These unallocated corporate income and expenses, which are in the "Other" category, include amortization of acquisition-related intangible assets,
restructuring charges, other charges, interest and other income, interest expense, and all administrative, research and development and selling and marketing expenses. Summarized financial information
on the Company's reportable segments, under the new organizational structure, is shown in the following table. The segment financial data for fiscal years 2004 and 2003 has been restated to reflect
this change. There were no inter-segment revenues for the periods shown below. The Company does not separately track all tangible assets or depreciation by operating segments nor are the segments
evaluated under these criteria. Segment financial information is summarized as follows for fiscal years 2005, 2004 and 2003:

OEM

Channel

DSG

Other

Total(in thousands)Fiscal 2005:Net revenues

$
296,323

$
140,335

$
38,332

$


$
474,990Segment income (loss)


97,625


23,2281


8,458


(221,730
)

(92,419
)Fiscal 2004:Net revenues

$
286,416

$
123,117

$
43,375

$


$
452,908Segment income (loss)


98,498


74,478


15,732


(158,774
)

29,934Fiscal 2003:Net revenues

$
215,228

$
138,804

$
54,081

$


$
408,113Segment income (loss)


98,143


85,468


20,866


(222,171
)

(17,694
)


---

The
following table presents the details of unallocated corporate income and expenses for fiscal years 2005, 2004 and 2003:

Years Ended March 31,2005

2004

2003(in thousands)Unallocated corporate expenses, net

$
(214,854
)
$
(197,840
)
$
(223,790
)Acquired in-process technology


(5,200
)

(7,649
)

Restructuring charges


(5,896
)

(4,313
)

(14,289
)Other charges


290


(5,977
)

(1,528
)Interest and other income


8,369


66,429


33,858Interest expense


(4,439
)

(9,424
)

(16,422
)Total

$
(221,730
)
$
(158,774
)
$
(222,171
)


F-52

---



The
following table presents net revenues by countries based on the location of the selling entities:

Years Ended March 31,2005

2004

2003(in thousands)United States

$
190,890

$
158,881

$
186,210Singapore


283,872


239,644


221,847Other countries


228


54,383


56Total

$
474,990

$
452,908

$
408,113


The
following table presents net property and equipment by countries based on the location of the assets:

March 31,2005

2004(in thousands)United States

$
37,393

$
40,518Singapore


16,284


15,064Other countries


2,503


2,853Total

$
56,180

$
58,435


Significant Customer Information

Two customers accounted for 14% and 11% of gross accounts receivable at March 31, 2005. One customer accounted for 12% of gross accounts receivable at
March 31, 2004. In fiscal 2005, IBM and Dell accounted for 24% and 11% of total net revenues, respectively. In fiscal 2004, IBM and Dell accounted for 18% and 10% of total net revenues,
respectively. In fiscal 2003, Dell, IBM, Hewlett-Packard and Ingram Micro accounted for 14%, 13%, 11% and 10% of total net revenues, respectively.

Note 18. Supplemental Disclosure of Cash Flows

Years Ended March 31,2005

2004

2003(in thousands)Interest paid

$
4,308

$
9,810

$
17,478Income taxes paid


2,679


1,430


1,424Income tax refund received


964


23,405


354Non-cash investing and financial activities:Deferred stock-based compensation


3,598





Adjustment for deferred stock-based compensation


(563
)

(1,323
)

(2,417
)Common stock issued for acquisitions


3,464


1,582


Unrealized gain (loss) on available-for-sale securities


(2,732
)

(1,709
)

1,151Restricted Stock


118





Software licenses financed








6,057


F-53

---



Note 19. Comparative Quarterly Financial Data (unaudited)

The following table summarized the Company's quarterly financial data:

QuartersFirst

Second

Third

Fourth

Year(in thousands, except per share amounts)Fiscal 2005:Net revenues

$
115,502

$
121,700

$
126,548

$
111,240

$
474,990Gross profit


50,368


53,426


42,891


34,559


181,244Net income (loss)


10


(8,063
)

22,489


(159,542
)

(145,106
)Net income (loss) per share:Basic

$
0.00

$
(0.07
)
$
0.20

$
(1,43
)
$
(1.31
)Diluted

$
0.00

$
(0.07
)
$
0.17

$
(1.43
)
$
(1.31
)Shares used in computing net (income) loss per share:Basic


109,840


110,312


111,136


111,905


110,798Diluted


111,536


110,312


134,517


111,905


110,798Fiscal 2004:Net revenues

$
107,293

$
109,192

$
115,143

$
121,280

$
452,908Gross profit


45,814


46,397


46,568


49,929


188,708Net income (loss)


40,802


261


(3,013
)

24,857


62,907Net income (loss) per share:Basic

$
0.38

$
0.00

$
(0.03
)
$
0.23

$
0.58Diluted

$
0.33

$
0.00

$
(0.03
)
$
0.19

$
0.53Shares used in computing net income (loss) Per share:Basic


107,956


108,411


108,858


109,400


108,656Diluted


127,901


110,219


108,858


135,494


128,807


In
the first quarter of fiscal 2005, the Company purchased the IBM i/p Series RAID business (Note 2) and made a payment of $1.3 million to NSE in the form of a license fee
(Note 8). In the second quarter of fiscal 2005, the Company purchased Snap Appliance (Note 2). In the third quarter of fiscal 2005 the Company made acquisition related cash payments to
former employees of Snap Appliance (Note 2), recorded a gain of $2.8 million on the sale of certain properties (Note 10), made a payment of $0.4 million to NSE in the form
of a license fee (Note 8) and received a tax benefit from the settlements of disputes with the IRS (Note 14). In the fourth quarter of fiscal 2005, the Company recorded an impairment
charge of $52.3 million to reduce goodwill related to its Channel segment (Note 5), recorded charges of $0.9 million and $1.6 million for severance, benefits, loss on the
sale of property and equipment and legal fees associated with the strategic alliances entered into with ServerEngines and Vitesse, respectively (Note 10), incurred $17.6 million in tax
expense associated with the repatriation of $360.6 million in cash from its Singapore subsidiary and recorded a valuation allowance for deferred tax assets of $67.9 million
(Note 14). In the first quarter of fiscal 2004, the Company purchased Eurologic and ICP vortex (Note 2) and recorded a gain of $49.3 million related to the settlement with the
former president of DPT (Note 8). The Company implemented restructuring plans in the first quarter of fiscal 2005, second quarter of fiscal 2005, third quarter of fiscal 2005, fourth quarter of
fiscal 2005, second quarter of fiscal 2004, third quarter of fiscal 2004 and fourth quarter fiscal 2004. In the fourth quarter of fiscal 2004, the Company purchased Elipsan and recorded a reduction in
the deferred tax asset valuation allowance of $21.6 million, recorded a

F-54

---



reduction
of previously accrued tax related liabilities of $6.3 million and recorded a $5.0 million charge for impairment of properties classified as assets held for sale as the carrying
amount exceeded its estimated fair value less cost to sell (Note 10). These transactions affect the comparability of this data.

Note 20. Glossary

The following is a list of business related acronyms that are contained within this Annual Report on Form 10-K. They are listed in alphabetical
order.



F-55

---





The
following is a list of accounting rules and regulations and related regulatory bodies referred to within this Annual Report on Form 10-K. They are listed in
alphabetical order.



F-56

---





F-57

---







REPORT OF INDEPENDENT REGISTERED PUBLIC ACCOUNTING FIRM

To
the Board of Directors and Stockholders
of Adaptec, Inc.

We
have completed an integrated audit of Adaptec, Inc.'s 2005 consolidated financial statements and of its internal control over financial reporting as of March 31, 2005
and audits of its 2004 and 2003 consolidated financial statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits,
are presented below.

Consolidated financial statements and financial statement schedule

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial
position of Adaptec, Inc. and its subsidiaries at March 31, 2005 and 2004, and the results of their operations and their cash flows for each of the three years in the period ended
March 31, 2005 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule listed in the index
appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial
statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement
schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (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 of financial statements includes examining, on a
test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the
overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Internal control over financial reporting

Also, in our opinion, management's assessment, included in management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the
Company maintained effective internal control over financial reporting as of March 31, 2005 based on criteria established inInternal ControlIntegrated
Frameworkissued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria.
Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2005, based on criteria established in Internal ControlIntegrated
Frameworkissued by the COSO. The Company's management is responsible for maintaining effective internal control
over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the
effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the
Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over
financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting,
evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the
circumstances. We believe that our audit provides a reasonable basis for our opinions.

A
company's internal control over financial reporting is a process designed to provide reasonable assurance regarding the reliability of financial reporting and the preparation of
financial statements for

F-58

---



external
purposes in accordance with generally accepted accounting principles. A company's internal control over financial reporting includes those policies and procedures that (i) pertain to
the maintenance of records that, in reasonable detail, accurately and fairly reflect the transactions and dispositions of the assets of the company; (ii) provide reasonable assurance that
transactions are recorded as necessary to permit preparation of financial statements in accordance with generally accepted accounting principles, and that receipts and expenditures of the company are
being made only in accordance with authorizations of management and directors of the company; and (iii) provide reasonable assurance regarding prevention or timely detection of unauthorized
acquisition, use, or disposition of the company's assets that could have a material effect on the financial statements.

Because
of its inherent limitations, internal control over financial reporting may not prevent or detect misstatements. Also, projections of any evaluation of effectiveness to future
periods are subject to the risk that controls may become inadequate because of changes in conditions, or that the degree of compliance with the policies or procedures may deteriorate.

/s/
PricewaterhouseCoopers LLP

San
Jose, California
June 10, 2005

F-59

---



INDEX TO EXHIBITS

|     |  |                                                                                                                                                                     |  | Incorporated by Reference
|---- |  | ------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | -------------------------
|
|2.01 |  | First Amended and Restated Master Separation and Distribution Agreement between the Registrant and Roxio, Inc., dated February 28, 2001.                            |  | 10-Q                     
|2.02 |  | General Assignment and Assumption Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                              |  | 10-Q                     
|2.03 |  | Indemnification and Insurance Matters Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                          |  | 10-Q                     
|2.04 |  | Master Patent Ownership and License Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                            |  | 10-Q                     
|2.05 |  | Master Technology Ownership and License Agreement between Registrant and Roxio, Inc., dated May 5, 2001.                                                            |  | 10-Q                     
|2.06 |  | Master Confidential Disclosure Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                 |  | 10-Q                     
|2.07 |  | Master Transitional Services Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                   |  | 10-Q                     
|2.08 |  | Employee Matters Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                               |  | 10-Q                     
|2.09 |  | Tax Sharing Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                                    |  | 10-Q                     
|2.10 |  | International Asset Transfer Agreement between Adaptec Mfg (S) Pte Ltd and Roxio Cl Ltd., dated May 5, 2001.                                                        |  | 10-Q                     
|2.11 |  | Letter of Agreement between the Registrant and Roxio, Inc., dated May 5, 2001.                                                                                      |  | 10-Q                     
|2.12 |  | Agreement and Plan of Merger and Reorganization, dated July 2, 2001, by and among the Registrant, Pinehurst Acquisition Corporation and Platys Communications, Inc. |  | 8-K                      
|3.01 |  | Certificate of Incorporation of Registrant filed with Delaware Secretary of State on November 19, 1997.                                                             |  | 10-K                     
|3.02 |  | Bylaws of Registrant, as amended on June 3, 2004.                                                                                                                   |  | 10-K                     
|     |  |                                                                                                                                                                     |  |                          

---



|4.01 |  | Indenture, dated as of March 5, 2002, by and between the Registrant and Wells Fargo Bank, National Association.                                                                                                                               |  | S-3   |  | 333-89666  |  | 4.04 |  | 06/03/02 |  | 
|---- |  | --------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ----- |  | ---------- |  | ---- |  | -------- |  | 
|4.02 |  | Form of 3% Convertible Subordinated Note.                                                                                                                                                                                                     |  | S-3   |  | 333-89666  |  | 4.05 |  | 06/03/02 |  | 
|4.03 |  | Registration Rights Agreement, dated as of March 5, 2002, by and among the Registrant and Bear, Stearns & Co. Inc., Merrill Lynch, Pierce, Fenner & Smith Incorporated, Banc of America Securities LLC and Morgan Stanley & Co.
Incorporated. |  | S-3   |  | 333-89666  |  | 4.06 |  | 06/03/02 |  | 
|4.04 |  | Collateral Pledge and Security Agreement, dated as of March 5, 2002, by and among the Registrant, Wells Fargo Bank, National Association, as trustee and Wells Fargo Bank, National Association, as collateral agent.                         |  | S-3   |  | 333-89666  |  | 4.07 |  | 06/03/02 |  | 
|4.05 |  | Stock Purchase Warrant, dated March 24, 2002, issued to International Business Machines Corporation.                                                                                                                                          |  | S-3   |  | 333-86098  |  | 4.04 |  | 04/12/02 |  | 
|4.06 |  | Indenture, dated as of December 22, 2003, by and between the Registrant and Wells Fargo Bank, National Association.                                                                                                                           |  | 10-Q  |  | 000-15071  |  | 4.01 |  | 02/09/04 |  | 
|4.07 |  | Form of 3/4% Convertible Senior Subordinated Note.                                                                                                                                                                                            |  | 10-Q  |  | 000-15071  |  | 4.02 |  | 02/09/04 |  | 
|4.08 |  | Registration Rights Agreement, dated as of December 22, 2003, by and among the Registrant, and Merrill Lynch, Pierce, Fenner & Smith Incorporated and Banc of America Securities LLC.                                                         |  | 10-Q  |  | 000-15071  |  | 4.03 |  | 02/09/04 |  | 
|4.09 |  | Collateral Pledge and Security Agreement, dated as of December 22, 2003, by and among the Registrant, Wells Fargo Bank, National Association, as trustee, and Wells Fargo Bank, National Association, as collateral agent.                    |  | 10-Q  |  | 000-15071  |  | 4.04 |  | 02/09/04 |  | 
|4.10 |  | Warrant Agreement, dated as of June 29, 2004, between the Registrant and International Business Machines Corporation                                                                                                                          |  | S-3   |  | 333-119266 |  | 4.03 |  | 09/02/04 |  | 
|4.11 |  | Warrant Agreement, dated as of August 10, 2004, between the Registrant and International Business Machines Corporation                                                                                                                        |  | S-3   |  | 333-119266 |  | 4.04 |  | 09/02/04 |  | 
|4.12 |  | Third Amended and Restated Rights Agreement dated February 1, 2001 between the Registrant and Mellon Investor Services LLC, as Rights Agent                                                                                                   |  | 8-A/A |  | 000-15071  |  | 4.1  |  | 03/20/01 |  | 
|     |  |                                                                                                                                                                                                                                               |  |       |  |            |  |      |  |          |  | 

---



|10.01 |  | Registrant's Savings and Retirement Plan.                                                                                                                                                                                                      |  | 10-K    |  | 000-15071 |  | (A)       |  | (A       | ) |  
|----- | - | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------- |  | --------- |  | --------- |  | -------- | - | -
|10.02 |  | Second Amendment to the Registrant's Savings and Retirement Plan.                                                                                                                                                                              |  | 10-K    |  | 000-15071 |  | 10.02     |  | 06/14/04 |   |  
|10.03 |  | Third Amendment to the Registrant's Savings and Retirement Plan.                                                                                                                                                                               |  |         |  |           |  |           |  |          |   | X
|10.04 |  | Registrant's 1986 Employee Stock Purchase Plan (amended and restated June 1998, August 2000 and August 2003).                                                                                                                                  |  | 10-Q    |  | 000-15071 |  | 10.01     |  | 11/03/03 |   |  
|10.05 |  | 1990 Stock Plan, as amended.                                                                                                                                                                                                                   |  | SC TO-I |  | 005-38119 |  | 99.(d)(1) |  | 05/22/01 |   |  
|10.06 |  | Forms of Stock Option Agreement, Tandem Stock Option/SAR Agreement, Restricted Stock Purchase Agreement, Stock Appreciation Rights Agreement, and Incentive Stock Rights Agreement for use in connection with the 1990 Stock Plan, as amended. |  | 10-K405 |  | 000-15071 |  | (B)       |  | (B       | ) |  
|10.07 |  | 1999 Stock Plan.                                                                                                                                                                                                                               |  | SC TO-I |  | 005-38119 |  | 99.(d)(2) |  | 05/22/01 |   |  
|10.08 |  | 2000 Nonstatutory Stock Option Plan and Form of Stock Option Agreement.                                                                                                                                                                        |  | SC TO-I |  | 005-38119 |  | 99.(d)(3) |  | 05/22/01 |   |  
|10.09 |  | 1990 Directors' Option Plan and forms of Stock Option Agreement, as amended.                                                                                                                                                                   |  | 10-K    |  | 000-15071 |  | 10.6      |  | 06/29/99 |   |  
|10.10 |  | 2000 Director Option Plan and Form of Agreement.                                                                                                                                                                                               |  | 10-Q    |  | 000-15071 |  | 10.1      |  | 11/06/00 |   |  
|10.11 | * | Option Agreement I between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995.                                                                                                        |  | 10-Q    |  | 000-15071 |  | 10.1      |  | 02/09/96 |   |  
|10.12 | * | Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. dated October 23, 1995.                                                                                                       |  | 10-Q    |  | 000-15071 |  | 10.2      |  | 02/09/96 |   |  
|10.13 |   | Modification to Amendment to Option Agreement I & II between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing (S) Pte. Ltd.                                                                                              |  | 10-K    |  | 000-15071 |  | 10.17     |  | 06/29/99 |   |  
|10.14 | * | Amendment to Option Agreements I & II between Taiwan Semiconductor Manufacturing Co., Ltd. and Adaptec Manufacturing (S) Pte. Ltd.                                                                                                             |  | 10-K    |  | 000-15071 |  | 10.16     |  | 06/29/99 |   |  
|10.15 | * | Amendment No. 3 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd.                                                                                                            |  | 10-K    |  | 000-15071 |  | 10.15     |  | 06/27/00 |   |  
|10.16 | * | Amendment No. 4 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd.                                                                                                            |  | 10-K    |  | 000-15071 |  | 10.15     |  | 06/26/01 |   |  
|      |   |                                                                                                                                                                                                                                                |  |         |  |           |  |           |  |          |   |  

---



|10.17 | * | Amendment No. 5 to Option Agreement II between Adaptec Manufacturing (S) Pte. Ltd. and Taiwan Semiconductor Manufacturing Co., Ltd. |  | 10-Q |  | 000-15071  |  | 10.01 |  | 02/11/02 |  | 
|----- | - | ----------------------------------------------------------------------------------------------------------------------------------- |  | ---- |  | ---------- |  | ----- |  | -------- |  | 
|10.18 |  | Form of Indemnification Agreement entered into between Registrant and its officers and directors.                                   |  | 10-K |  | 000-15071  |  | 10.14 |  | 06/26/98 |  | 
|10.19 |   | Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor.                               |  | 10-K |  | 000-15071  |  | 10.16 |  | 06/28/95 |  | 
|10.20 |   | Amendment to the Industrial Lease Agreement between the Registrant, as Lessee, and Jurong Town Corporation, as Lessor.              |  | 10-K |  | 000-15071  |  | 10.20 |  | 06/14/04 |  | 
|10.21 |   | License Agreement between International Business Machines Corporation and the Registrant.                                           |  | 10-K |  | 000-15071  |  | 10.14 |  | 06/27/00 |  | 
|10.22 |   | Amendment to License Agreement between International Business Machines Corporation and the Registrant.                              |  | 10-K |  | 000-15071  |  | 10.21 |  | 06/24/02 |  | 
|10.23 |   | Asset Purchase Agreement between International Business Machines Corporation and the Registrant.                                    |  | 10-K |  | 000-15071  |  | 10.22 |  | 06/24/02 |  | 
|10.24 | * | Dell Supplier Master Purchase Agreement, dated as of September 27, 2002, by and between Dell Products L.P. and the Registrant.      |  | 8-K  |  | 000-15071  |  | 99.1  |  | 01/24/03 |  | 
|10.25 |  | Registrant's Incentive Plan                                                                                                         |  | 10-Q |  | 000-15071  |  | 10.01 |  | 08/09/04 |  | 
|10.26 |  | Amended Registrant's Incentive Plan                                                                                                 |  | 10-Q |  | 000-15071  |  | 10.01 |  | 02/07/05 |  | 
|10.27 |  | Ken Arola Termination Agreement                                                                                                     |  | 10-Q |  | 000-15071  |  | 10.02 |  | 08/09/04 |  | 
|10.28 |   | Base Agreement, dated as of March 24, 2002, by and between the Registrant and International Business Machines Corporation           |  | 10-Q |  | 000-15071  |  | 10.03 |  | 08/09/04 |  | 
|10.29 |  | 2004 Equity Incentive Plan                                                                                                          |  | S-8  |  | 333-119271 |  | 4.03  |  | 09/24/04 |  | 
|10.30 |  | Form of Stock Option Agreement under the 2004 Equity Incentive Plan                                                                 |  | 10-Q |  | 000-15071  |  | 10.02 |  | 11/10/04 |  | 
|10.31 |  | Form of Restricted Stock Purchase Agreement under the 2004 Equity Incentive Plan                                                    |  | 10-Q |  | 000-15071  |  | 10.03 |  | 11/10/04 |  | 
|10.32 |  | Form of Restricted Stock Unit Agreement under the 2004 Equity Incentive Plan                                                        |  | 10-Q |  | 000-15071  |  | 10.04 |  | 11/10/04 |  | 
|10.33 |  | Registrant's Variable Incentive Plan                                                                                                |  | 10-Q |  | 000-15071  |  | 10.05 |  | 11/10/04 |  | 
|10.34 |  | Registrant's Deferred Compensation Plan (amended and restated July 2004)                                                            |  | 10-Q |  | 000-15071  |  | 10.06 |  | 11/10/04 |  | 
|      |   |                                                                                                                                     |  |      |  |            |  |       |  |          |  | 

---



|10.35 |  | Eurologic Systems Group Limited 1998 Share Option Plan Rules (Amended as of 1 April 2003)                                               |  | S-8 |  | 333-104685 |  | 4.03  |  | 04/23/03 |  |  
|----- | - | --------------------------------------------------------------------------------------------------------------------------------------- |  | --- |  | ---------- |  | ----- |  | -------- |  | -
|10.36 |  | Broadband Storage, Inc. 2001 Stock Option and Restricted Stock Purchase Plan                                                            |  | S-8 |  | 333-118090 |  | 4.03  |  | 08/10/04 |  |  
|10.37 |  | Snap Appliance, Inc. 2002 Stock Option and Restricted Stock Purchase Plan                                                               |  | S-8 |  | 333-118090 |  | 4.04  |  | 08/10/04 |  |  
|10.38 |  | Sundi Sundaresh offer letter, dated May 6, 2005                                                                                         |  | 8-K |  | 000-15071  |  | 10.01 |  | 05/26/05 |  |  
|10.39 |  | D. Scott Mercer offer letter                                                                                                            |  | 8-K |  | 000-15071  |  | 10.01 |  | 06/06/05 |  |  
|10.40 |  | Sundi Sundaresh offer letter, dated June 1, 2005                                                                                        |  | 8-K |  | 000-15071  |  | 10.02 |  | 06/06/05 |  |  
|10.41 |  | Chairman of the Board Compensation Arrangement                                                                                          |  |     |  |            |  |       |  |          |  | X
|10.42 |  | Eric Kelly Employment and Non-Competition Agreement                                                                                     |  |     |  |            |  |       |  |          |  | X
|10.43 |  | Marshall Mohr offer letter                                                                                                              |  |     |  |            |  |       |  |          |  | X
|10.44 |  | Kok Yong Lim offer letter                                                                                                               |  |     |  |            |  |       |  |          |  | X
|10.45 |  | Stargate Solutions, Inc. 1999 Incentive Stock Plan                                                                                      |  | S-8 |  | 333-69116  |  | 4.03  |  | 09/07/01 |  |  
|10.46 |  | Distributed Processing Technology Corp. Omnibus Stock Option Plan                                                                       |  |     |  |            |  |       |  |          |  | X
|21.01 |   | Subsidiaries of Registrant.                                                                                                             |  |     |  |            |  |       |  |          |  | X
|23.01 |   | Consent of Independent Registered Public Accounting Firm, PricewaterhouseCoopers LLP.                                                   |  |     |  |            |  |       |  |          |  | X
|31.01 |   | Certification of Interim Chief Executive Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                             |  |     |  |            |  |       |  |          |  | X
|31.02 |   | Certification of Chief Financial Officer pursuant to Section 302 of the Sarbanes-Oxley Act of 2002.                                     |  |     |  |            |  |       |  |          |  | X
|32.01 |   | Certification of Interim Chief Executive Officer and Chief Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of 2002. |  |     |  |            |  |       |  |          |  | X

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