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

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FORM 10-K

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x ANNUAL REPORT PURSUANT TO SECTION 13 OR 15(d) OF THE SECURITIES EXCHANGE ACT OF 1934.

For the fiscal year ended March 31, 2007

 ̈ 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

Adaptec, Inc.(Exact name of Registrant as Specified in its Charter)



|Delaware                                                       | 94-2748530                             
|-------------------------------------------------------------- | ---------------------------------------
|(State or Other Jurisdiction of Incorporation or Organization) | (I.R.S. Employer Identification Number)

691 S. Milpitas Blvd.
Milpitas, California     95035

(408) 945-8600

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Securities registered pursuant to Section 12(b) of the Act: Common Stock, $0.001 Par Value(Title of Class) The NASDAQ Global Market(Name of Each Exchange on which Registered)Securities registered pursuant to Section 12(g) of the Act:None


Indicate by check mark if the registrant is a well-known seasoned issuer, as defined in Rule 405 of the Securities Act.    
YES     ̈ NO    x

Indicate by check mark if the registrant is not required to file reports pursuant to Section 13 or Section 15(d) of the Act.    
YES     ̈ NO    x


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 reports), and (2) has been subject to such filing requirements for the past 90 days.    
YES    x NO     ̈

Indicate by check mark if disclosure of delinquent filers pursuant to Item 405 of Regulation S-K is not
contained herein, and will not be contained, to the best of registrant's knowledge, in definitive proxy or information statements
incorporated by reference in Part III of this Form10-K or any amendment to this Form 10-K.
   x


Indicate by check mark whether the registrant is a large accelerated filer, an accelerated filer, or a non-accelerated filer.
See definition of "accelerated filer and large accelerated filer" in Rule 12b-2 of the Exchange Act. (Check one):

Large accelerated filer      ̈ Accelerated filer    x Non-accelerated filer     ̈


Indicate by check mark whether the registrant is a shell company (as defined in Rule 12b-2 of the Exchange Act).    
YES     ̈ NO    x

The aggregate market value of the voting stock held by non-affiliates of the Registrant was $455,180,805 based on the closing sale price of the Registrant's
common stock on The NASDAQ Global 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 May 30, 2007, the Registrant had 118,967,080 shares of common stock outstanding, $.001 par value per share.DOCUMENTS INCORPORATED BY REFERENCE

Part III incorporates by reference certain information from the Registrant's definitive Proxy Statement for its
2007 Annual Meeting of Stockholders.
PDF provided as courtesyTable of Contents

|PART I  
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|Item 1. 
|Item 1A.
|Item 1B.
|Item 2. 
|Item 3. 
|Item 4. 
|Item 4A.
|PART II 
|Item 5. 
|Item 6. 
|Item 7. 
|Item 7A.
|Item 8. 
|Item 9. 
|Item 9A.
|Item 9B.
|PART III
|Item 10.
|Item 11.
|Item 12.
|Item 13.
|Item 14.
|PART IV 
|Item 15.
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PART I

FORWARD LOOKING STATEMENTSThis 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 the market for our products and their benefits to our customers, our intention to continue to evaluate acquisitions, strategic
alliances and/or strategic investments, the levels of our expenditures and savings for various expense items and our expected capital
expenditures and 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



For your convenience, we have included, in Note 21 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 provide storage solutions that reliably move,
manage and protect critical data and digital content. We deliver software and hardware components that provide reliable storage
connectivity and advanced data protection to leading OEMs and through distribution channel partners. Our software and hardware
products range from HBAs, RAID controllers, host RAID software, Adaptec RAID Code software, Advanced Data Protection software,
Storage Management software, Snapshot software and other solutions that span the SCSI, SAS, SATA and iSCSI interface
technologies. Our Snap Servers offer NAS solutions for both fixed capacity and future scalability. System integrators and white box
suppliers build server and storage solutions based on Adaptec technology in order to deliver products with superior price and
performance, data protection and interoperability.

Our broad range of RAID controllers, ASICs and add-in
cards give businesses a variety of price and performance options for connecting their storage. These options range from low cost HBAs
to high performance and high availability RAID controller cards. Further, our products use a common management interface designed
to simplify storage administration and reduce related costs. Our products are sold to enterprises, SMBs, government agencies and
retail users engaged in a broad range of vertical markets across geographically diverse markets through OEMs and distribution channel
customers, including system integrators.

Our management team continuously reviews and
evaluates all aspects of our business, including our product portfolio, our relationships with strategic partners and our research and
development focus to better scale our operations relative to our cost basis. To date, we have implemented the following steps to
support our corporate strategy:





















Unless otherwise indicated the following discussion
pertains only to our continuing operations.

We focused on strengthening our market position
through innovation and new products, which included delivering thirty new products over the past five quarters. We compete in the
markets we serve on the basis of key technologies, ease-of-use and cost effectiveness as follows:























We were incorporated in 1981 in California and completed our initial public offering
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 Internet
website at http://www.adaptec.com 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 2007, our DPS segment accounted for
$209.9 million of our net revenues, our SSG segment accounted for $28.1 million of our net revenues and our DSG
segment accounted for $17.2 million of our net revenues (See Note 18 of the Notes to Consolidated Financial Statements
for further discussion of our segments' results).

Following are discussions of our key product offerings
for our DPS, SSG and DSG businesses.

DPS

Components.

RAID Controllers and HBAs.

Host I/O.

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.

The primary software products that we license are as
follows:

Host RAID.

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

RAID

Adaptec Storage Manager.

SSG

Storage Systems.

Fixed Capacity.

Scalable.

Software

Data Protection.

DSG

Our DSG segment consisted of high-performance I/O
connectivity, digital media products and flexible desktop storage and gaming products for users and professionals in the desktop PC
and notebook aftermarket. Our connectivity products enabled connections between computers, peripherals and consumer electronic
devices. Our digital media products, including video and Media Center products, enabled users to capture, create, manage and share
television, digital audio and video on their computers, CDs and DVDs.  With OEMs incorporating other connectivity technologies directly
into their products, the increased level of competition entering the market, and the complexities of the retail channel, we decided not to
invest further in our DSG segment and exited from the business at the end of fiscal 2007.



Sales, Marketing and Customers

We supply a broad range of storage products and
maintain a sales, distribution, service and support infrastructure.

We sell through our sales force to distribution channels
worldwide, which market our products under the Adaptec brand; they, in turn, sell to VARs, system integrators and retail customers. We
provide training and support for our distribution customers and to VARs. 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
45% of our total revenues in fiscal 2007.



We emphasize customer service as a key element of
our marketing strategy and maintain application engineers at our corporate headquarters and in the field. This includes assisting current
and prospective customers in the use of our products, and providing the systems-level expertise and software experience of our
engineering staff to customers with particularly difficult design problems. A high level of customer service is also maintained through
technical support hotlines, email and dial-in-fax capabilities.Our primary distributors in fiscal 2007, in alphabetical order, were Bell Microproducts, CPI Computer Partner Handels GmbH,
Ingram Micro and Tech Data. Our primary OEM customers in fiscal 2007, in alphabetical order, were Dell, Hewlett-Packard, Hitachi,
IBM and SuperMicro Computer, Inc.

In fiscal 2007, IBM and Dell accounted for 34% and 13%
of our total net revenues, respectively. In fiscal 2006, IBM and Dell accounted for 28% and 15% of our total net revenues, respectively.
In fiscal 2005, IBM and Dell accounted for 24% and 14% of our total net revenues, respectively.

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 license to
use all of our patents for the same period. A number of the licensed patents have either expired or are no longer significant to our
product portfolio. If we should determine that it is necessary to extend the term of the patent license beyond June 30, 2007, we
believe that we will be able to reach agreement with IBM for such an extension, without interruption to our business operations. 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. In September 2005,
we sold the IBM i/p Series RAID business back to IBM. In addition, IBM purchased certain related inventory. We also granted IBM a
nonexclusive license to certain intellectual property and sold to IBM substantially all of the assets dedicated to the engineering and
manufacturing of RAID controllers and connectivity products for the IBM i/p Series RAID business. For further discussion on
agreements between us and IBM, please refer to Notes 2 and 16 to the Notes to Consolidated Financial Statements.

International

We maintain operations in eight foreign 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 both stability to our operations and diversifies
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 18 in the Notes to Consolidated Financial Statements. We generated
approximately 66% of our overall revenues in 2007 from outside of the United States. These sales include sales to foreign subsidiaries
of U.S. companies. A majority of our revenues originating outside the United States was from commercial customers rather than foreign
governments.

Competition

The markets for all of our products within the DPS and
SSG segments are highly competitive and are characterized by rapid technological advances, frequent new product introductions,
evolving industry and customer standards and competitive pricing pressures. Our competitive strategy is to continue to leverage our
technical expertise and concentrate on delivering a comprehensive set of highly reliable, high performance storage and connectivity
products with superior data protection 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 DPS products are: product price versus performance, product features and functionality, reliability, technical service and
support, scalability and interoperability and brand awareness. We compete primarily with product offerings from Applied Micro Circuits
(3Ware), Areca, LSI Logic and Promise.

We believe the principal competitive factors in the
markets for our SSG products are: product price versus performance, product features and functionality, ease-of-use, breadth of
product line, reliability, technical service and support, value-added software functionality for data protection, management, and
movement, and brand awareness.  At the low end of the market, some of our Snap Server product line competes with product offerings
from Buffalo, Iomega and LeCie. At the mid range of the market, some of our Snap Server product line competes with product offerings
from Dell, Hewlett-Packard and Network Appliance.

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 for our continuing operations at March 31, 2007 was approximately $5.0 million, consisting of
$4.5 million related to our DPS segment and $0.5 million related to our SSG segment. Our backlog for our continuing
operations at March 31, 2006 was approximately $21.5 million, consisting of $20.2 million related to our DPS
segment and $1.3 million related to our DSG segment, and excluded our backlog related to the Snap Server portion of our
systems business that was previously included in discontinued operations in fiscal 2006. 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

Beginning in the fourth quarter of fiscal 2006, we
employed Sanmina-SCI Corporation to manufacture the majority of our products. We employ Surface Mount Technology Corporation,
or SMTC, to manufacture certain of our ServeRAID products that are sold to IBM. We also employ SuperMicro and Universal Scientific
Industrial Co., Ltd., or USI, to manufacture certain systems products. We believe that SMTC, SuperMicro, USI and Sanmina-SCI will be
able to meet our anticipated needs for both current and future technologies.





Intellectual Property



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.  A
number of the licensed patents have either expired or are no longer significant to our product portfolio. If we should determine that it is
necessary to extend the term of the patent license beyond June 30, 2007, we believe that we will be able to reach agreement
with IBM for such an extension, without interruption to our business operations.



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. 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. We maintain a research and development center in Bangalore, India, which we expanded in fiscal 2007.

Approximately 44% of our employees are engaged in
research and development. In fiscal 2007, 2006 and 2005, our research and development expenses were $56.6 million, or 22%
of total net revenues, $68.2 million, or 20% of total net revenues, and $93.2 million, or 23% 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 Operations." Although we are not currently
utilizing products from Vitesse and ServerEngines, we will continue to utilize ASICs from other third parties to allow us to better focus
on our core strengths by delivering advanced data protection technology to our OEM and channel customers worldwide.



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.



Similar legislation has been or may be enacted in other
jurisdictions and countries.  If our products become non-compliant with the various environmental laws and regulations, we could incur
substantial costs which could negatively affect our results of operations and financial position. For example, in fiscal 2006, we recorded
an excess inventory expense of $1.9 million related to the transition of our products to comply with the RoHS Directive.

Employees

As of March 31, 2007, we had 598 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.



Item 1A. Risk Factors



The impact of contract negotiations with our
large OEM customers, industry technology transitions and market acceptance of our new products could cause our quarterly revenues
to continue to decline.

In order to execute our strategies, we may acquire, enter
into strategic alliances with, or invest in companies with complementary or strategic products or technologies.  Costs associated with
these acquisitions or strategic alliances may adversely affect our results of operations. This impact could be exacerbated if we are
unable to integrate the acquired companies, products or technologies.



The benefits of any acquisitions, strategic alliances or
investments may prove to be less than anticipated and may not outweigh the costs reported in our financial statements, and we may
not obtain the operational leverage or realize the improvements we intend or desire with the actions we take.

Completing any potential future acquisitions, strategic
alliances or investments could cause significant diversions of management time and resources and divert focus from the activities of
our current operations.  We may encounter difficulty in integrating and assimilating the operations and personnel of the acquired
companies into our operations or the acquired technology and rights into our services.  We may also lack the experience or expertise in
the new products and markets, which may impair the relationships with customers or suppliers of the acquired business.  The
acquisition of new operations may require us to develop additional internal controls to support these new operations.  We may
experience material deficiencies or weaknesses in our internal control over financial reporting as a result of the addition of new
operations or due to changes to our internal controls, which could have a material impact on our results of operations when corrected.
Additionally, we may not be successful in overcoming these risks or any other problems encountered in connection with these or other
acquisitions, strategic alliances or investments, which could result in an adverse impact on our ability to develop or even sustain the
acquired business.

If we acquire new 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. If we were to use a substantial portion of our available cash, we might need to repatriate cash from our subsidiaries,
which may cause us to incur additional income taxes at up to the United States Federal statutory rate of 40%. In addition, we may be
required to invest significant resources in order to perform under a strategic alliance or to complete an acquisition or investment, which
could adversely affect our results of operations, at least in the short-term, even if we believe the acquisition, strategic alliance or
investment will benefit us in the long-term.

If we are not successful in completing an
acquisition or strategic alliance or investing in companies with complementary or strategic products or technologies, our future growth
may be hindered.

As our revenue base continues to decline from our
current operations, we may choose to exit or divest some or a substantial portion of our current operations to focus on new
opportunities.



Actions that we have taken and the actions that we are considering could adversely affect our business
and financial results in the short-term, and may not have the long-term beneficial results that we intend. Our management team
continuously reviews and evaluates all aspects of our business, including our product portfolio, our relationships with strategic partners
and our research and development focus to better scale our operations relative to our cost basis.





Our dependence on new products may cause our net
revenues to fluctuate or decline.



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.

We depend on contract manufacturers and
subcontractors, and if they fail to meet our manufacturing needs, it could delay shipments of our products and result in the loss of
customers or revenue and increased manufacturing costs, which would have an adverse effect on our results.

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.

If we fail to adequately forecast demand for our
products, we may incur excess product inventory costs and 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 net revenues.

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 operating expenses are largely based on
anticipated revenues, and a large portion of our expenses, including facility costs 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 securities 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.



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.

We have in the past obtained cash from capital
market financing, and if we need to seek additional financing, it may not be available on favorable terms.

We may be subject to a higher effective tax rate
that could negatively affect our results of operations and financial position.



The factors noted above may cause a higher effective
tax rate that could materially affect our income tax provision, results of operations or cash flows in the period or periods for which such
determination is made.

We held approximately $93.8 million of cash, cash
equivalents and marketable securities at our subsidiaries in Singapore and Cayman Licensing at March 31, 2007. 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.

The migration of our international operations from one
country to another involves risks, which may require us to record additional tax reserves.

Our operations depend on key personnel, the loss of
whom could affect the growth and success of our business.

Our reliance on industry standards and technological
changes in the marketplace may cause our net revenues to fluctuate or decline.

Technologies:



Operating Systems:



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 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 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 and financial results 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.

Similar legislation has been or may be enacted in other
jurisdictions and countries.  If our products become non-compliant with the various environmental laws and regulations, we could incur
substantial costs which could negatively affect our results of operations and financial position.

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.

If we are unable to compete effectively, our net
revenues could be adversely affected.



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. In addition, revenues for our SATA products
sold to our OEM customers has declined and we expect these revenues to continue to decline, as our products are at the end of their
life cycles and certain of our customers have moved to other suppliers to obtain the next generation SATA technologies.

The future success of our DPS segment will depend on
the level of acceptance of our RAID products and products based on the next generation SAS technologies by new and existing
customers, and the future success of our SSG segment will depend on the continued acceptance and growth of our Snap Server
products. Our future operating results will also be influenced by our ability to participate in the development of the network storage
market in which we face intense competition from other companies that are also focusing on networked storage products. If we
experience an incremental decline in our revenues beyond the declines anticipated, and we are unable to effectively manage our
inventory levels, we may be required to record additional inventory-related charges, which would adversely impact our gross
margins.

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



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.

Product quality problems could lead to reduced
revenues and gross margins.

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 customers and negatively affect our operations.



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 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.

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. For example, some of our distributors threatened to stop selling our products or make pricing of our products non-competitive if
we did not agree to absorb their costs to comply with the RoHS and the Waste Electrical and Electronic Equipment Directives with
respect to our products.  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.

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.

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.

Our international operations involve a number of political, economic and other risks that could
adversely affect our ability to sell our products in certain countries, create local economic conditions that
reduce demand for our products among our target markets and expose us to potential disruption in the supply of
necessary components.

We depend on third parties to transport our
products.



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.

If we are unable to protect and enforce our intellectual
property rights, we may be unable to compete effectively.

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.

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 management time
and attention, and could adversely affect our business and financial results.





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.

We are exposed to fluctuations in foreign currency
exchange rates.

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.

Changes in securities laws and regulations have
increased and may continue to increase our costs.

In addition, the NASDAQ Global 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, 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.

Internal control issues that appear minor now may later
become material weaknesses.

We may encounter natural disasters, which could
cause disruption to our employees or interrupt the manufacturing process for our products.

Manmade problems such as computer viruses or
terrorism may disrupt our operations and harm our operating results.

We may experience significant fluctuations in our stock
price, which may, in turn, significantly affect the trading price of our convertible notes.

Our charter documents and Delaware law
contain anti-takeover provisions that could prevent, discourage or delay a change in control or management, which may affect the price
of our common stock.







As of March 31, 2007, we owned and leased
various properties in the United States and in foreign countries totaling approximately 701,000 square feet, of which approximately
409,000 square feet were leased/subleased or available to lease/sublease to third parties. The building leases expire at varying dates
through fiscal 2012 and include renewals at our option. Our headquarters are located in Milpitas, California, which includes research
and development, technical support, sales, marketing and administrative functions. In addition, we lease buildings in Florida,
Minnesota, New Hampshire, North Carolina, Texas and Washington. We use these properties primarily for research and development,
technical support, sales and marketing functions. Internationally, we operate in Australia, China, England, Germany, India, Ireland,
Japan and Singapore. We use these properties primarily for research and development, technical design, technical support and sales
functions.

The table below is a summary of the facilities we owned and leased at
March 31, 2007:

`United States       Other Countries        Total
                          ---------------      ---------------      ----------
                                               (in square feet)               
Owned Facilities                 279,000  (a)              --         279,000
Leased Facilities                354,000  (b)          68,000  (c)    422,000
                          ---------------      ---------------      ----------
    Total Facilities             633,000               68,000         701,000
                          ===============      ===============      ==========`

________________________

(a) Approximately 175,000 square feet are classified as assets held for sale.
There are leases on a portion of these facilities of approximately 51,000 square feet and approximately 54,000 square feet are available
for lease.

(b) There are subleases on a portion of these facilities of approximately 230,000 square feet and approximately 62,000 square feet are
available for lease.

(c) Approximately 12,000 square feet are available for sublease.

In May 2007, subsequent to fiscal year-end, we
completed the sale of some of our properties, which included three owned buildings, including associated building improvements and
property, plant and equipment that were previously classified as held for sale. Net proceeds from the sale of the properties aggregated
$19.0 million, which exceeded our carrying value of $12.3 million. As a result, a gain on the sale of the properties of $6.7 million
will be recorded in the first quarter of fiscal 2008 to "Other charges (gains)" in the Unaudited Condensed Consolidated
Statements of Operations.

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



We were subject to IRS audits for our fiscal years
1994 through 2003. During the third quarter of fiscal 2007, we reached resolution with the United States taxing authorities on all
outstanding audit issues. However, the tax provision continues to reflect judgment and estimation regarding components of the
settlement such as interest calculations and the application of the settlements to state and local taxing jurisdictions.  Although we
believe our tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our
consolidated financial statements and may cause a higher effective tax rate that could materially affect our income tax provision, results
of operations or cash flows in the period or periods for which such determination is made.











Item 4A. Executive Officers of the
Registrant

The following sets forth certain information regarding our
executive officers as of May 30, 2007:

Mr. Subramanian Sundaresh (age 51) has
served as our Chief Executive Officer since November 2005, 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 network storage controllers. From July 1998 to April 2002, Mr. Sundaresh served
as President and Chief Executive Officer of Jetstream Communications, a provider of 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. Christopher O'Meara (age 49) has served as
our Vice President and Chief Financial Officer since March 2006. Prior to rejoining Adaptec, Mr. O'Meara was Executive
Vice President and Chief Financial Officer at Tibco Software, Inc., a business integration and process management software
company, from August 2001 to October 2005 and as Vice President, Finance and Treasurer of
Tibco from August 1998 to August 2001. Mr. O'Meara previously worked at Adaptec from June 1988 to
July 1998 in various positions, which included Vice President, Treasurer and Director of Financial Planning.

Mr. Ted Chen (age 55) has served as our Vice President
of Marketing and General Manager of Data Protection Solutions Group since December 2006. Prior to joining Adaptec, Mr. Chen held
several senior positions at EMC Documentum Corporation from September 2002 to October 2006, which included Chief Technical
Officer for the Infrastructure Software Group and Vice President of products for the Emerging Software Business Unit. He joined EMC
Documentum Corporation through its acquisition of Prisa Networks, Inc., a developer of SAN management software, where he was the
Executive Vice President responsible for engineering, business planning, marketing, and IT operations, from March 1999 to September
2002.



Mr. Russell Johnson (age 42) has served as our Vice
President of Worldwide Sales since July 2005.  Mr. Johnson has been with us for over 10 years in various positions, including, General
Manager and Vice President of Sales and Marketing for Adaptec Europe and Asia for four years and Global Account Director in the
Global Accounts Division for two   years.





Mr. Stephen Terlizzi (age 42) has served as our
Vice President and General Manager of the Storage and Solutions Group since October 2006. Prior to joining Adaptec, Mr. Terlizzi was
Vice President of Global Marketing at Atempo, Inc., a storage software company specializing in data protection and archiving solutions,
from January 2005 to October 2006 and Vice President of Marketing and Business Development at Candera, Inc., from July 2003 to
December 2004.  He was also the Vice President of Z-force, Inc., which is now known as Attune Systems, Inc., a provider of
enterprise-class Network File Management solutions, from December 2001 to July 2003.  Mr. Terlizzi also held several senior
Sales and Marketing Management positions at EMC Documentum Corporation from May 1992 to September 2001.

---



PART II



Market Information for Common Stock

Our common stock is traded on the NASDAQ Global
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 Global Market. The market price of our common stock has been volatile. See "Risk
Factors."

`Fiscal 2007           Fiscal 2006
                      --------------------  --------------------
                        High        Low       High        Low
                      ---------  ---------  ---------  ---------
First quarter        $    5.90  $    4.08  $    4.88  $    3.34
Second quarter            4.66       3.80       4.50       3.12
Third quarter             4.79       4.22       6.22       3.46
Fourth quarter            4.75       3.45       6.70       5.40`

As of May 30, 2007, there were approximately 615
stockholders of record of our common stock.

Dividends



Recent Sale of Unregistered Securities



In February 2007, we inadvertently issued 38,591 shares of our common stock to 27 of our employees under
our 1986 Employee Stock Purchase Plan for aggregate consideration of approximately $120,000; such issuance occurred subsequent
to the expiration of our 1986 Employee Stock Purchase Plan in April 2006.  For more information regarding the issuance of these
shares, see Note 8 to the Notes to Consolidated Financial Statements.

Issuer Purchases of Equity Securities



Stock Performance Graph







|                                  |  | 3/02   | 3/03  | 3/04   | 3/05   | 3/06   | 3/07  
|--------------------------------- |  | ------ | ----- | ------ | ------ | ------ | ------
|                                  |  |        |       |        |        |        |       
|Adaptec, Inc.                     |  | 100.00 | 45.10 | 65.52  | 35.83  | 41.36  | 28.95 
|NASDAQ Composite                  |  | 100.00 | 72.11 | 109.76 | 111.26 | 132.74 | 139.65
|NASDAQ Computer & Data
Processing |  | 100.00 | 76.72 | 96.82  | 104.03 | 122.64 | 133.49

The stock price performance included in this graph is not necessarily
indicative of future stock price performance.



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 completed the sale to IBM of our IBM i/p Series RAID business in September 2005 and sold the
OEM block-based portion of our systems business to Sanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI
USA, Inc. in January 2006. The information below has been reclassified to reflect the IBM i/p Series RAID business and
the OEM block-based portion of our systems business as discontinued operations.

`Years Ended March 31,
                                                       ---------------------------------------------------------------
                                                       2007(2)(3)   2006(2)(4)   2005(2)(5)   2004(2)(6)     2003(2)
                                                       -----------  -----------  -----------  -----------  -----------
                                                                  (in thousands, except per share amounts)            
Consolidated Statements of Operations Data:                                                                           
    Net revenues(1)                                   $   255,208  $   344,142  $   402,516  $   395,688  $   408,113
    Cost of revenues(1)                                   173,974      230,249      240,314      209,268      203,203
                                                       -----------  -----------  -----------  -----------  -----------
    Gross profit                                           81,234      113,893      162,202      186,420      204,910
                                                       -----------  -----------  -----------  -----------  -----------
    Total operating expenses(1)                           142,305      262,424      244,202      196,014      237,167
    Income (loss) from continuing operations               24,846     (135,832)    (129,645)      78,207      (13,184)
    Loss from discontinued operations,
      net of taxes                                           (546)     (22,410)     (15,461)     (15,300)      (2,242)
    Income from disposal of discontinued operations,
      net of taxes                                          6,543        9,810           --           --           --
    Net income (loss)                                 $    30,843  $  (148,432) $  (145,106) $    62,907  $   (15,426)
Net Income (Loss) Per Share Data:                                                                                     
    Basic:
        Continuing operations                         $      0.21  $     (1.20) $     (1.17) $      0.72  $     (0.12)
        Discontinued operations                       $      0.05  $     (0.11) $     (0.14) $     (0.14) $     (0.02)
        Net income (loss)                             $      0.26  $     (1.31) $     (1.31) $      0.58  $     (0.14)
    Diluted:
        Continuing operations                         $      0.20  $     (1.20) $     (1.17) $      0.65  $     (0.12)
        Discontinued operations                       $      0.04  $     (0.11) $     (0.14) $     (0.12) $     (0.02)
        Net income (loss)                             $      0.25  $     (1.31) $     (1.31) $      0.53  $     (0.14)
    Shares used in computing net income (loss) per share:
        Basic                                             116,602      113,405      110,798      108,656      106,772
        Diluted                                           136,690      113,405      110,798      128,807      106,772
                                                                                                                      
                                                                                  March 31,
                                                       ---------------------------------------------------------------
                                                       2007(2)(3)   2006(2)(4)   2005(2)(5)   2004(2)(6)     2003(2)
                                                       -----------  -----------  -----------  -----------  -----------
                                                                               (in thousands)                         
Consolidated Balance Sheets Data:                                                                                     
    Cash, cash equivalents and marketable securities  $   572,423  $   556,552  $   526,556  $   663,854  $   742,302
    Restricted cash and marketable securities               3,244        4,749        6,381        9,161       14,789
    Net assets of discontinued operations                      --           --       55,774           --           --
    Total assets                                          715,402      737,399      963,506    1,051,104    1,102,979
    Long-term liabilities                                 228,009      229,349      263,664      263,852      252,596
    Stockholders' equity                                  422,158      369,445      510,323      644,891      602,777
    Working capital                                       616,033      522,039      507,122      715,228      645,320`

________________________

Notes:

(1) Prior period consolidated financial statements have
been reclassified to conform to the current period presentation. These reclassifications have no impact on net income (loss), total
assets or total stockholders' equity.

(2) We completed a total of five acquisitions in fiscal years 2005 and 2004 and recorded write-offs of acquired
in-process technologies for the Snap Appliance and Elipsan acquisitions (Note 10). We recorded restructuring charges in fiscal
years 2007, 2006, 2005, 2004 and 2003 (Note 11). These actions affect the comparability of this data.

(3) In fiscal 2007, we (i) recorded an impairment charge of $13.2 million related to the Snap server portion of
our systems business (Note 5), (ii) recorded stock-based compensation in accordance with SFAS No. 123(R) of $8.5 million (Note 8),
(iii) recorded a write-down of a minority investment of $0.9 million (Note 12), and (iv) received a discrete tax benefit of $60.2 million
primarily attributable to the settlement of certain tax disputes with the United States and Singapore taxing authorities, including the
resolution of our fiscal 1997 U.S. Tax Court Litigation and for our fiscal 2002 and fiscal 2003 IRS audit cycles. These actions affect the
comparability of this data.

(4) In fiscal 2006, we recorded (i) an impairment charge of $90.6 million to write-off goodwill
(Note 5), (ii) an impairment charge of $10.0 million to write-down the systems business' long-lived assets to fair value
(Note 2), (iii) a loss on disposal of assets of $1.6 million (Note 12), (iv) a gain of $12.1 million on the sale of the OEM
block-based systems business (Note 2), and (v) a loss of $2.3 million on the disposal of the IBM i/p Series RAID business (Note 2).
These actions affect the comparability of this data.

(5) In fiscal 2005, we (i) recorded an impairment charge of $52.3 million to reduce goodwill related
to our former Channel segment (Note 5), (ii) recorded a gain of $2.8 million on the sale of certain properties (Note
12), (iii) 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 12),
(iv) made a payment of $1.7 million to NSE in the form of a license fee (Note 13), (v) received a tax benefit
from the settlement of disputes with the United States taxing authorities, (vi) incurred $17.6 million in tax expense (Note
14) and a $4.5 million loss on marketable securities (Note 3) associated with the repatriation of $360.6 million in cash from our
Singapore subsidiary (Note 14) and (vii) recorded a valuation allowance for deferred tax assets of $67.9 million
(Note 14). These actions affect the comparability of this data.

(6) In fiscal 2004, we recorded (i) a gain of $49.3 million related to the settlement with the former
president of Distributed Processing Technology Corporation, or DPT, (ii) a reduction in the deferred tax asset valuation allowance of
$21.6 million, (iii) a $6.0 million impairment charge, and (iv) a reduction of previously accrued tax related liabilities of
$6.3 million. These actions affect the comparability of this
data.



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 anticipated declines in revenues from our parallel products and our SATA products sold to
our OEM customers, the expected increase in revenues from our SSG segment, our intention to continue to evaluate acquisitions,
strategic alliances and/or strategic investments and our expected capital expenditures and liquidity in future periods. 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 1A of this Annual Report on
Form 10-K. As a result, our actual results may differ materially from those anticipated in these forward-looking
statements.

Basis of Presentation

We sold our IBM i/p Series RAID component
business, or IBM i/p Series RAID Business, to IBM in September 2005, and the OEM block-based portion of our systems business to
Sanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI USA in January 2006. Accordingly, we reclassified the
financial statements and related disclosures for all periods presented to reflect both of these businesses as discontinued operations. In
addition, we reorganized our segments in the first quarter of fiscal 2007, identifying SSG as a new segment, in addition to our then
existing DPS and DSG segments.  Our SSG segment primarily provides Snap Server products, including NAS hardware and related
software.  We sell these products to VARs and end users through our network of distribution and reseller channels.

In the second quarter of fiscal 2007, we decided not
to invest further in our DSG segment due to OEMs incorporating other connectivity technologies directly into their products, the
increased level of competition entering the market and the complexities of the retail channel. As a result, we wound down the business
throughout fiscal 2007 and exited it at March 31, 2007. Our DSG segment provided high-performance I/O connectivity and digital media
products for personal computing platforms, including notebook and desktop PCs, which were sold to retailers, OEMs and distributors.
The remaining SCSI products from our DSG segment will be included with our DPS segment beginning in the first quarter of fiscal
2008.

As further described below, the growth of our new
generation of serial products is not keeping pace with the decline in revenue from our parallel products.  In light of this situation, we
believe we should seek growth opportunities beyond those presented by our existing product lines.  As such, we will evaluate
opportunities to acquire, enter into strategic alliances with or invest in companies with complementary or strategic products or
technologies in order to scale our business. We also continue to review and evaluate our existing product portfolio, operating structure
and markets to determine the future viability of our existing products and market positions.

Overview

In fiscal 2007, our revenues decreased 26% as
compared to fiscal 2006 due primarily to slower adoption of our newer generation of serial products by our customers and the declining
revenue base of our parallel products. We expect revenues from our parallel products to continue to decline in fiscal 2008. The decline
in gross margin in fiscal 2007 compared to fiscal 2006 was primarily due to significant decrease in revenues, changes in our product
mix from higher to lower margin products, and to a lesser extent, inventory-related charges as a result of a significant decline in our
revenues, primarily from our OEM customers, compared to our original projections. Operating expenses also decreased in fiscal 2007
as compared to fiscal 2006 primarily as a result of cost reductions and restructuring efforts that were initiated in previous quarters.

Our future revenue growth in our DPS segment remains
largely dependent on the success of our new products addressing serial technologies (for example, SAS and SATA), new OEM design
wins, channel growth and our ability to develop new products in other markets. Our future revenue growth in our SSG segment remains
largely dependent on the successful development and marketing of new products and our ability to expand our presence in the reseller
channel.

Results of Operations

The following table sets forth the items in the
Consolidated Statements of Operations as a percentage of revenues (references to notes in the footnotes to this table are to the Notes
to Consolidated Financial Statements appearing in this Annual Report on Form 10-K):

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                   2007(2)(3)    2006(2)(4)    2005(2)(5)
                                                                  ------------  ------------  ------------
Net revenues                                                              100 %         100 %         100 %
Cost of revenues(1)                                                        68            67            60
                                                                  ------------  ------------  ------------
Gross profit                                                               32            33            40
                                                                  ------------  ------------  ------------
Operating expenses:
Research and development(1)                                                22            20            23
Selling, marketing and administrative(1)                                   24            21            20
Amortization of acquisition-related intangible assets                       2             3             3
Write-off of acquired in-process technology                                --            --            --
Restructuring charges                                                       2             3             1
Goodwill impairment                                                        --            26            13
Other charges (gains)                                                       6             3            --
                                                                  ------------  ------------  ------------
Total operating expenses                                                   56            76            60
                                                                  ------------  ------------  ------------
Loss from continuing operations                                           (24)          (43)          (20)
Interest and other income(1)                                               10             5             2
Interest expense                                                           (1)           (1)           (1)
                                                                  ------------  ------------  ------------
Loss from continuing operations before income taxes                       (15)          (39)          (19)
Provision for (benefit from) income taxes                                 (25)           --            13
                                                                  ------------  ------------  ------------
Income (loss) from continuing operations                                   10           (39)          (32)
                                                                  ------------  ------------  ------------
Discontinued operations, net of taxes:
Income (loss) from discontinued operations, net of taxes                   --            (7)           (4)
Income from disposal of discontinued operations, net of taxes               2             3            --
                                                                  ------------  ------------  ------------
Income (loss) from discontinued operations, net of taxes                    2            (4)           (4)
                                                                  ------------  ------------  ------------
Net income (loss)                                                          12 %         (43)%         (36)%
                                                                  ============  ============  ============`

________________________

Notes:

(1)Prior period financial statements have been
reclassified to conform to the current period presentation. These reclassifications have no impact on net loss.

(2) We completed two acquisitions in fiscal 2005 and recorded a write-off of acquired in-process technology for
the Snap Appliance acquisition (Note 10). We recorded restructuring charges in fiscal years 2007, 2006 and 2005 (Note 11).
These actions affect the comparability of this data.

(3) In fiscal 2007, we (i) recorded an impairment charge of $13.2 million related to the Snap server portion of
our systems business (Note 5), (ii) recorded stock-based compensation in accordance with SFAS No. 123(R) of $8.5 million (Note 8),
(iii) recorded a write-down of a minority investment of $0.9 million (Note 12), and (iv) received a discrete tax benefit of $60.2 million
primarily attributable to the settlement of certain tax disputes with the United States and Singapore taxing authorities, including the
resolution of our fiscal 1997 U.S. Tax Court Litigation and for our fiscal 2002 and fiscal 2003 IRS audit cycles. These actions affect the
comparability of this data.

(4) In fiscal 2006, we recorded (i) an impairment charge of $90.6 million to write-off goodwill
(Note 5), (ii) an impairment charge of $10.0 million to write-down the systems business' long-lived assets to fair value
(Note 2) and (iii) a loss on disposal of assets of $1.6 million (Note 12). These actions affect the comparability of this
data.

(5) In fiscal 2005, we (i) recorded an impairment charge of $52.3 million to reduce goodwill related
to our former Channel segment (Note 5), (ii) recorded a gain of $2.8 million on the sale of certain properties
(Note 12), (iii) 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 12), (iv) made a payment of $1.7 million to NSE in the form of a license fee (Note 13), (v) received a tax
benefit from the settlement of disputes with the United States taxing authorities, (vi) incurred $17.6 million in tax expense
(Note 14) and a $4.5 million loss on marketable securities (Note 3) associated with the repatriation of $360.6 million in cash from
our Singapore subsidiary (Note 14) and (vii) recorded a valuation allowance for deferred tax assets of $67.9 million
(Note 14). These actions affect the comparability of this data.

Net Revenues.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
DPS                            $   209.9        (24)% $   276.2        (17)% $   333.0
SSG                                 28.1        (17)%      34.0          9 %      31.2
DSG                                 17.2        (49)%      33.9        (11)%      38.3
                                --------- ----------   --------- ----------   ---------   
Total Revenues                 $   255.2        (26)% $   344.1        (15)% $   402.5    
                                =========              =========              =========`

Fiscal 2007 compared to Fiscal 2006

Revenues from our DPS segment decreased by $66.3
million in fiscal 2007 as compared to fiscal 2006, reflecting a 37% decline in sales volumes of our parallel SCSI products, which was
partially offset by a 34% increase in sales of our serial products. The decline in sales volumes of our SCSI products was primarily
attributable to the transition from parallel to serial products, in which we have a lower market share, and a continuing shift to
lower-priced SATA solutions, in which there is a more competitive market.  Sales of our parallel SCSI products represented 61% of the total
DPS sales in fiscal 2007 compared to 74% in fiscal 2006, while sales of our serial products represented 36% of the total DPS sales in
fiscal 2007 compared to 20% in fiscal 2006. We expect revenues for our parallel SCSI products to continue to decline. The DPS
segment was also negatively impacted in fiscal 2007 due to a decline in sales volumes for our SATA solution products sold to our OEM
customers, as the products are reaching the end of their life cycles.  We expect revenues for our SATA products sold to our OEM
customers to continue to decline, as certain of our customers have moved to other suppliers to obtain next generation SATA
technologies. The DPS segment performance was also hindered during fiscal 2007 due to supply issues that resulted from the
transition of our manufacturing operations to Sanmina-SCI in January 2006. Sanmina-SCI experienced material shortages and was
challenged with systems' transitions that impacted its ability to meet delivery commitments on a consistent basis, which consequently
prevented us from completing certain product shipments during the first quarter of fiscal 2007. We continued to see an impact in our
channel penetration in the second and third quarters of fiscal 2007 as a result of these challenges in the first quarter of fiscal 2007.

Revenues from our SSG segment decreased by $5.9
million in fiscal 2007 as compared to fiscal 2006 primarily as a result of our reduced sales and marketing activities while the Snap
Server portion of our systems business was available for sale, combined with customer concerns over the future of this product line. We
expect revenues to increase in the future as we invest additional sales and marketing resources in our SSG business and the
uncertainty surrounding the Snap Server business dissipates due to our decision to retain this business.

Revenues from our DSG segment decreased by
$16.7

Fiscal 2006 compared to Fiscal 2005

Revenues from our DPS segment decreased by
$56.8 million in fiscal 2006 as compared to fiscal 2005 reflecting a decline in sales volumes and average selling prices of our
parallel SCSI products, which was partially offset by increased sales of our serial products and benefits associated with the
renegotiation of a customer supply contract. The decline in sales volumes of our SCSI products was primarily attributable to the
transition from our Ultra 160 products to our Ultra 320 products in which we have a lower market share and a shift to lower cost SATA
solutions in which there is a more competitive market.

Revenues from our SSG segment increased by $2.8
million in fiscal 2006 compared to fiscal 2005 primarily due to the acquisition of Snap Appliance in the second quarter of fiscal 2005,
partially offset by reduced sales of our DAS and fibre-attached storage products reflecting reduced sales and marketing activities as the
Snap Server portion of our systems business was available for sale.

Revenues from our DSG segment decreased by
$4.4 million in fiscal 2006 compared to fiscal 2005 primarily due to the decline in sales volumes of our SCSI-based desktop
computer products. This decline was partially offset by increased sales of our digital media products and sales of storage products that
were introduced in the fourth quarter of fiscal 2005.

Geographical Revenues and Customer
Concentration

`Geographical Revenues:                                  FY2007     FY2006      FY2005
-----------------------------------------              --------- ----------   ---------   
North America                                                44 %       41 %        38 %
Europe                                                       27 %       29 %        31 %
Pacific Rim                                                  29 %       30 %        31 %
                                                       --------- ----------   ---------   
Total Revenues                                              100 %      100 %       100 %  
                                                       ========= ==========   =========`

Our overall international revenues declined as a
percentage of our total revenues in fiscal 2007 as compared to fiscal 2006 primarily as a result of a customer that ceased purchasing
from us during fiscal 2006, which contributed $11.7 million to European revenues during fiscal 2006 pursuant to a last-time buy order,
and supply issues at Sanmina-SCI, which impacted its ability to meet delivery commitments in fiscal 2007. This in turn prevented us
from completing certain product shipments during fiscal 2007, which included shipments to our international distributors that sell to
international customers. Our North America revenues increased as a percentage of our total revenues in fiscal 2006 as compared to
fiscal 2005 primarily as a result of benefits associated with the renegotiation of a customer supply contract and increased sales related
to a North American OEM, partially offset by a decline in channel sales in North America. Included in European revenues for fiscal 2006
was $11.7 million of a last-time buy customer order.

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. The following table represents customers that have generated greater than 10%
of our total net revenues during fiscal years 2007, 2006 and 2005:

`Customers as a Percentage of Net Revenue:               FY2007     FY2006      FY2005
-----------------------------------------              --------- ----------   ---------   
IBM                                                          34 %       28 %        24 %
Dell                                                         13 %       15 %        14 %`



`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Gross Margin                   $    81.2        (29)% $   113.9        (30)%     162.2
Gross Profit                          32 %                   33 %                   40 %`





The decline in gross margin in fiscal 2006 compared to
fiscal 2005 was primarily due to changes in our product and customer mix, which led to lower average margins, fixed costs that were
distributed over lower revenue levels and an excess inventory expense of $1.9 million recorded in fiscal 2006 related to the
transition of our products to comply with the RoHS Directive. This was partially offset by decreased component costs and benefits
associated with the renegotiation of a customer supply contract.

Research and Development Expense.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Research and Development       $    56.6        (17)% $    68.2        (27)% $    93.2`

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.

The decrease in research and development expense in
fiscal 2007 as compared to fiscal 2006 was primarily due to reduced headcount as a result of restructuring programs implemented in
fiscal 2006 and the first half of fiscal 2007, and decreased infrastructure spending.  This was reflected by a decrease in headcount by
33% in fiscal 2007 compared to fiscal 2006 for employees engaged in research and development.  The decrease in fiscal 2007 as
compared to fiscal 2006 was partially offset by stock-based compensation charges related to the adoption of SFAS No. 123(R) of $3.8
million in fiscal 2007 as fiscal 2006 had no such charges.

The decrease in research and development expense in
fiscal 2006 as compared to fiscal 2005 was primarily a result of reduced headcount achieved as a result of the ServerEngines and
Vitesse strategic alliances we entered into in the fourth quarter of fiscal 2005, decreased infrastructure spending and reduced
headcount as a result of restructuring programs implemented in fiscal 2005 and decreased deferred compensation charges in fiscal
2006 compared to fiscal 2005. This was reflected by a decrease in headcount by 22% in fiscal 2006 compared to fiscal 2005 for
employees engaged in research and development. Deferred compensation charges represented
the vesting of assumed stock options in connection with our acquisition of Platys Communications, Inc., or Platys, in
August 2001. Deferred compensation charges associated with the Platys acquisition ceased in the first quarter of fiscal 2006.

Selling, Marketing and Administrative Expense.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Selling, Marketing
and Administrative             $    61.3        (15)% $    72.4         (8)% $    78.7`

As our selling, marketing and administrative expense
consists primarily of salaries, including commissions, our expense fluctuates based on changes to our revenue levels.

The decrease in selling, marketing and administrative
expense in fiscal 2007 as compared to fiscal 2006 was primarily a result of reductions of our workforce and infrastructure spending as a
result of the restructuring plans we implemented in fiscal 2006 and the first half of fiscal 2007, and $1.2 million of compensation
expense recorded in the first quarter of fiscal 2006 for retirement costs related to our former Chief Executive Officer.  This was partially
offset by increased spending in marketing and selling activities of $2.7 million related to increased investments for our SSG segment. In
addition, selling, marketing and administrative expense for fiscal 2007 included $4.1 million of stock-based compensation charges
related to the adoption of SFAS No. 123(R), while fiscal 2006 had no such charges. Overall headcount decreased by 28% in fiscal 2007
compared to fiscal 2006 for employees engaged in selling, marketing and administrative functions.

The decrease in selling, marketing and administrative
expense in fiscal 2006 as compared to fiscal 2005 was primarily a result of decreased spending due to lower revenues and reductions
of our workforce and infrastructure spending as a result of the restructuring plans we implemented in fiscal 2005 and the third quarter of
fiscal 2006. This was reflected by a decrease in headcount by 18% in fiscal 2006 compared to fiscal 2005 for employees engaged in
selling, marketing and administrative functions. The decrease in fiscal 2006 as compared to fiscal 2005 was partially offset by
compensation of $1.2 million recorded in the first quarter of fiscal 2006 related to retirement costs of our former Chief Executive
Officer.

Amortization of Acquisition-Related Intangible
Assets.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Amortization of Acquisition-
Related Intangible Assets      $     6.0        (35)% $     9.2        (24)% $    12.2`

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 five years.

The decrease in amortization of acquisition-related
intangible assets in fiscal 2007 compared to fiscal 2006 was primarily due to lower amortization of $1.8 million related to Snap
Appliance intangible assets which were written down through "Other charges (gains)" in March and June 2006, intangible
assets that became fully amortized in August 2005 associated with our acquisition of Platys of $1.3 million and certain intangible assets
that became fully amortized in fiscal 2006 associated with our acquisition of ICP vortex Computersysteme GmbH of $1.0 million. This
was partially offset by increased amortization of intangible assets that were retained after the disposition of the IBM i/p Series RAID
component business, or IBM i/p Series RAID Business, in September 2005 by $0.9 million as we reduced the remaining useful lives of
these assets.

The decrease in amortization of acquisition-related
intangible assets in fiscal 2006 compared to fiscal 2005 was due to intangible assets that became fully amortized in August 2005
associated with our Platys acquisition and certain intangible assets that became fully amortized in fiscal 2005 associated with our
acquisition of Eurologic Systems Group Limited in April 2003.

Write-off of Acquired In-Process Technology.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Write-off of Acquired
In-Process Technology          $      --         -- % $      --       (100)% $     2.2`

As part of the purchase accounting for the Snap
Appliance acquisition, certain amounts of the purchase price were allocated to acquired in-process technology based on established
valuation techniques in the high-technology computer industry and written off in the second quarter of fiscal 2005 because technological
feasibility had not been established and no alternative future uses existed.

Restructuring Charges.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Restructuring Charges          $     3.7        (64)% $    10.4         77 % $     5.9`

During fiscal years 2007, 2006 and 2005, 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 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 of our restructuring plans, please refer to Note 11 to the Notes to
Consolidated Financial Statements.

Fiscal 2007 Restructuring Plans

In the first and second quarters of fiscal 2007,
management approved and initiated plans to restructure our operations by simplifying our infrastructure. These restructuring plans
eliminated certain duplicative assets and resources in all functions of the organization worldwide due to consolidating certain processes
in order to reduce our cost structure, which resulted in a charge of $3.9 million in fiscal 2007. In addition, we recorded minimal provision
adjustments in fiscal 2007 related to asset impairments, which were partially offset by a reduction for severance and benefits as actual
results were lower than anticipated.



Fiscal 2006 Restructuring Plans

In the third and fourth quarters of fiscal 2006,
management approved and initiated plans to restructure our operations by simplifying our infrastructure. These restructuring plans
eliminated certain duplicative resources in all functions of the organization worldwide, due in part, to the discontinued operations, the
vacating of redundant facilities in order to reduce our cost structure, and sale of our Singapore manufacturing facility.  This resulted in a
restructuring charge of $9.8 million, of which $9.1 million related to the involuntary termination of employees in all functions
of the organization and $0.7 million related to the estimated loss on our facilities in fiscal 2006. In addition, we recorded minimal
provision adjustments in fiscal 2007, as actual results for severance and benefits were lower than anticipated. The reserve balance of
$0.3 million as of March 31, 2007 related to these restructuring plans will be substantially paid off by the second quarter of fiscal 2008,
primarily attributable to longer term lease obligations.

Fiscal 2005 Restructuring Plans

In each quarter of fiscal 2005, we implemented
restructuring plans to streamline the corporate organization, thereby reducing operating costs by consolidating duplicative resources in
connection with the acquisition of Snap Appliance and the Vitesse strategic alliance and costs pertaining to estimated future obligations
for non-cancelable lease payments for excess facilities in Germany and United Kingdom. This resulted in a restructuring charge of
$5.8 million, of which $5.2 million related to the involuntary termination of employees in all functions of the organization
and $0.6 million related to the estimated loss on our facilities in fiscal 2005. During fiscal years 2006 and 2005, we recorded
adjustments to the fiscal 2005 restructuring plans of $(0.4) million and $(0.2) million, respectively, related to the reduction
for severance and benefits as actual results were lower than anticipated and a reduction of lease costs related to the estimated loss on
our facilities. As of March 31, 2006, we had utilized all of these charges and the plans are now complete.

In addition, we recorded provision adjustments related to
our fiscal years 2004, 2003, 2002 and 2001 restructuring plans and Snap Appliance Acquisition-Related Restructuring Plan (Note 11) in
fiscal years 2007, 2006 and 2005 for $(0.2) million, $1.0 million and $0.3 million, respectively. In fiscal 2007, the provision
adjustments primarily related to the reduction of lease costs related to the estimated loss on our facilities. In fiscal years 2006 and 2005,
the provision adjustments primarily related to additional lease costs related to the estimated loss on our facilities that we sublease,
which was partially offset by the reduction of severance and benefits as actual results were lower than anticipated.

Goodwill Impairment.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Goodwill Impairment            $      --       (100)% $    90.6         73 % $    52.3`

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 operating 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 segment exceeds its implied fair value, goodwill is considered
impaired and a second step is performed to measure the amount of impairment loss, if any.

In connection with the reorganization of our segments in
fiscal 2006, an assessment of the recoverability of goodwill was performed. As a result of this review, we wrote-off our entire balance of
goodwill of $90.6 million in the second quarter of fiscal 2006. Factors that led to this conclusion included, but were not limited to,
industry technology changes such as the shift from parallel to serial technology and the migration of core functionality to server
chipsets; required increased investments that eventually led us to sell the IBM i/p Series RAID Business in fiscal 2006 and the decision
to sell the systems business; continued losses associated with sales of systems to IBM; and general market conditions.

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 former 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 acquisitions and business alliances that occurred in fiscal 2005. These additional costs, along with industry
technology transitions, placed significant risk on our ability to achieve and maintain profitability, and, therefore adversely impacted our
profitability forecasts.

Other Charges (Gains).

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Impairment of assets related to
portion of systems business    $    13.2         32 % $    10.0        100 % $      --
Minority investments                 0.9        100 %        --         -- %        --
Manufacturing agreement             (0.1)      (110)%       1.6        100 %        --
Strategic alliances charges           --         -- %        --       (100)%       2.5
Sale of buildings                     --         -- %        --       (100)%      (2.8)
Other                                0.7        100 %        --         -- %        --
                                --------- ----------   --------- ----------   ---------   
Total Other Charges (Gains)    $    14.7         27 % $    11.6     (4,101)% $    (0.3)   
                                =========              =========              =========`

Other charges (gains) primarily consisted of asset
impairment charges related to certain properties or assets and a minority investment. Other charges (gains) also included charges
associated with our strategic alliances with ServerEngines and Vitesse.

Impairment of Assets related to a Portion of our
Systems Business and Other

We regularly perform reviews to determine if
facts or circumstances are present, either internal or external, which would indicate that the carrying values of our long-lived assets are
impaired. If an asset is determined to be impaired, the loss is measured based on the difference between the asset's fair value and its
carrying value. The estimate of fair value of the assets is based on discounting estimated future cash flows using a discount rate
commensurate with the risks inherent in our current business model. The estimation of the impairment involves numerous assumptions
that require judgment by us, including, but not limited to, future use of the assets for our operations versus sale or disposal of the assets
and future selling prices for our products.



We had classified the entire systems business as a
discontinued operation in September 2005 and sold the OEM block-based portion of the systems business in January 2006.  In the
fourth quarter of fiscal 2006, we recorded asset impairment charges of $10.0 million related to certain acquisition-related intangible
assets for the Snap Server portion of our systems business that was previously held for sale at March 31, 2006 to adjust the carrying
value of these assets to fair value, which was aligned to the offers made by potential purchasers.   With the decision at the end of the
first quarter of fiscal 2007 to retain and operate the Snap Server portion of the systems business, we performed an impairment analysis
of this business that indicated that the carrying amount of the long-lived assets exceeded their estimated fair value. This was due in part
to the limited cash flows of the business and a number of uncertainties, which included the significant research and development
expenditures necessary to grow the revenue of the Snap Server portion of the systems business and the significant uncertainties
associated with achieving such growth in revenue. This resulted in an impairment charge of $13.2 million, which was recorded in
"Other charges (gains)" in the Consolidated Statements of Operations in fiscal 2007. Also included in "Other charges
(gains)" in fiscal 2007 was $0.7 million for legal and consulting fees incurred in connection with our efforts that had been
undertaken to sell the Snap Systems portion of our business.

Impairment of Minority Investment

We hold minority investments in certain non-public
companies. We regularly monitor these minority investments for impairment and record reductions in the carrying values when the
impairment is deemed to be other-than-temporary. Circumstances that indicate an other-than-temporary decline include the length of
time and the extent to which the market value has been lower than cost. We recorded an impairment charge of $0.9 million in
fiscal 2007 related to a decline in the value of a minority investment deemed to be other-than-temporary.

Manufacturing Agreement

On December 23, 2005, we entered into a three-
year contract manufacturing agreement with Sanmina-SCI whereby Sanmina-SCI, upon the closing of the transaction on
January 9, 2006, assumed manufacturing operations of Adaptec products. In addition, we sold certain manufacturing assets,
buildings and improvements and inventory located in Singapore, with respect to printed circuit board assemblies and storage system manufacturing operations, to Sanmina-SCI for $26.6 million
(net of closing costs of $0.6 million), resulting in a loss on disposal of assets of $1.6 million that was recorded in fiscal 2006
in "Other charges (gains)" in the Consolidated Statements of Operations.

Strategic Alliance Charges

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.

Sale of Buildings

In fiscal 2004, 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. This
resulted in an impairment charge of $5.0 million to reduce the carrying value of these properties classified as assets held for sale
to fair value less cost to sell. In October 2004, we completed the sale of these properties with net proceeds from the sale of the
properties aggregating $9.6 million, which exceeded our final revised fair value of $6.8 million. As a result, a gain of $2.8
million on the sale of buildings was recorded in fiscal 2005 under "Other charges (gains)" in the Consolidated Statements of
Operations.



`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Interest Income                $    24.4         44 % $    16.9         43 % $    11.8
Payment of License Fee with NSE       --         -- %        --        100 %      (1.7)
Realized Loss on Repatriation         --         -- %        --        100 %      (4.5)
Loss on Extinguishment of Debt        --        100 %      (0.1)      (100)%        --
Other                                1.2         50 %       0.8        (69)%       2.8
                                --------- ----------   --------- ----------   ---------   
Total Interest and Other Income$    25.6         45 % $    17.6        111 % $     8.4    
                                =========              =========              =========`

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%
Convertible Subordinated Notes that was due in March 2007, or 3% Notes, fluctuations in foreign currency gains or losses, realized
gains and losses on marketable securities and sublease income received from third parties.

The increase in interest and other income in fiscal 2007
as compared to fiscal 2006 was primarily due to higher interest rates, which resulted in additional income earned on our cash, cash
equivalents and marketable securities and net gains from foreign currency fluctuations, primarily related to the Euro.  The increase in
interest and other income in fiscal 2006 as compared to fiscal 2005 was primarily due to higher interest rates earned on our cash, cash
equivalents and marketable securities in fiscal 2006 and a one-time fully paid-up license payment fee of $1.7 million to Nevada
SCSI Enterprises, Inc. and Thomas A. Gafford (jointly, "NSE"), which was recorded in fiscal 2005, primarily for
historical products that incorporated certain technology.

Interest Expense.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Interest Expense               $    (3.4)         3 % $    (3.3)       (25)% $    (4.4)`

Interest expense is primarily associated with our 3/4%
Convertible Senior Notes due 2023, or 3/4% Notes, and our 3% Notes, issued in December 2003 and March 2002,
respectively. Interest expense remained relatively flat for fiscal 2007 compared to fiscal 2006.  The decrease in interest expense for
fiscal 2006 compared to fiscal 2005 was primarily due to the reduction in the outstanding balances of the 3% Notes, as we repurchased
$24.6 million in aggregate principal amount of our 3% Notes during fiscal 2006.



`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Provision For (Benefit From)
Income Taxes                   $   (63.7)     4,062 % $     1.6        (97)% $    51.6`

For fiscal 2007, we recorded an income tax benefit of
$63.7 million on a pre-tax loss from continuing operations of $38.9 million. For fiscal years 2006 and 2005, we recorded
income tax provisions of $1.6 million and $51.6 million, respectively, on pre-tax losses from continuing operations of
$134.2 million and $78.1 million, respectively. Our fiscal 2007 effective income tax rate included a discrete tax benefit of $60.2
million, which was primarily attributable to our settling certain tax disputes with the United States and Singapore taxing authorities,
including the resolution of our fiscal 1997 U.S. Tax Court Litigation and our fiscal 2002 and fiscal 2003 IRS audit cycle.  In addition, our
effective tax rates for fiscal years 2007, 2006 and 2005 differed from the combined United States federal and state statutory income tax
rate of 40% primarily due to an increase in the valuation allowance for deferred tax assets. Other factors that contributed to our effective
tax rates which differed from the combined United States federal and state statutory income tax rate of 40% for fiscal years 2006 and
2005 included acquisition-related impairment charges and losses incurred in foreign jurisdictions for which no tax benefit was derived.
Our effective tax rate for fiscal 2005 also differed from the combined United States federal and state statutory income tax rate of 40%
primarily due to the tax on repatriation under the American Job Creations Act of 2004, also referred to as the Act, partially offset by a
tax benefit associated with settling certain tax disputes with the United States
taxing authorities.

We had a valuation allowance for deferred tax assets of
$124.1 million at March 31, 2007, as we determined that it was more likely than not that substantially all of our U.S.
deferred tax assets will not be realized. Factors that led to this conclusion included, but were not limited to, our past operating results,
cumulative tax losses in the United States and uncertain future income on a jurisdiction by jurisdiction basis. We continuously monitor
the circumstances impacting the expected realization of our deferred tax assets on a jurisdiction by jurisdiction basis.



On October 22, 2004, the Act was signed into law.
The Act created 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 and incurred a tax liability of
$17.6 million. The one-time deduction was allowed to the extent that the repatriated amounts were 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 $255.1 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 foreign subsidiaries 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 upon such repatriation.

Income (Loss) From Discontinued Operations, Net
of Taxes.

`Percentage             Percentage
                                 FY2007     Change      FY2006     Change      FY2005
                                --------- ----------   --------- ----------   ---------
                                             (in millions, except percentage)             
Income (Loss) From Discontinued
Operations, Net of Taxes       $     6.0        148 % $   (12.6)        19 % $   (15.5)`



IBM i/p Series RAID Business:  
On September 30, 2005, we entered into a series of arrangements with IBM pursuant to which we sold our IBM i/p Series RAID
Business to IBM for approximately $22.0 million plus $1.3 million for certain fixed assets. In addition, IBM purchased
certain related inventory at our net book value of $0.8 million. Expenses incurred in the transaction primarily included costs of
approximately $0.5 million for legal and accounting fees. In addition, we accrued $0.3 million for lease obligations. Under
the terms of the agreements, we granted IBM a nonexclusive license to certain intellectual property and sold to IBM substantially all of
the assets dedicated to the engineering and manufacturing of RAID controllers and connectivity products for the IBM i/p Series RAID
Business. Under the terms of the nonexclusive license, IBM paid us royalties for the sale of our board-level products on a quarterly
basis through March 31, 2007, which were recognized as contingent consideration in discontinued operations when earned. In fiscal
years 2007 and 2006, we received royalties, net of taxes, of $7.4 million and $4.6 million, respectively, which we recorded in
"Income (loss) from disposal of discontinued operations, net of taxes," in the Consolidated Statements of Operations. In
addition, in fiscal 2007, we recorded $0.8 million for the estimated loss on our facility related to the sale of the IBM i/p Series RAID
Business. To the extent that we are unable to sublease this facility by the end of the lease term, which is June 2010, we may continue
to record additional losses in discontinued operations in the future.

For fiscal 2005, the loss from discontinued operations
for the IBM i/p Series RAID Business included the write-off of acquired in process technology of $3.0 million and amortization of
intangible assets of $4.5 million. We also incurred $16.8 million in research and development costs while we generated a
gross margin of $14.0 million.

Systems Business:



For fiscal 2005, the loss from discontinued operations for the OEM block-based systems business included
revenue of $45.9 million. We also incurred $3.7 million in research and development costs while we generated a gross margin of
$5.0 million.

Liquidity and Capital Resources

Key Components of Cash Flow

Cash provided by operating activities was $14.8 million
in fiscal 2007 compared to cash used in operating activities was $7.1 million in fiscal 2006 and $10.3 million in fiscal 2005.
Cash provided by operating activities for fiscal 2007 resulted primarily from our income from continuing operations of $24.8 million,
adjusted for the benefit of non-cash items included in operating results which primarily consisted of depreciation and amortization of
intangible assets, property and equipment and marketable securities of $17.3 million, impairment charge of intangible assets of
$13.2 million, inventory-related charges of $12.9 million, stock-based compensation related to the adoption of SFAS No. 123(R) of $8.5
million and impairment of a minority investment of $0.9 million. Additional factors included the non-cash effect of tax settlement of
$60.2 million and changes to working capital assets and liabilities that decreased cash provided by operating activities by
$10.7 million, of which $11.4 million was due to a reduction in accounts payable, and cash provided by operating activities
of discontinued operations of $7.2 million. Cash used in operating activities for fiscal 2006 resulted primarily from our loss from
continuing operations of $135.8 million. This was partially offset by non-cash items included in operating results which primarily
consisted of an impairment of goodwill of $90.6 million, depreciation and amortization of intangible assets, property and
equipment and marketable securities of $25.9 million, impairment charge of intangible assets of $10.0 million and inventory-
related charges of $10.7 million. Additional factors included changes to working capital assets and liabilities that decreased cash
provided by operating activities by $19.1 million, of which $21.4 million was due to a reduction in accounts payable, and an
increase in cash provided by operating activities of discontinued operations of $6.1 million. Cash used in operating activities for
fiscal 2005 resulted primarily from our loss from continuing operations of $129.6 million. This was
offset by non-cash items included in operating results which primarily consisted of an impairment of goodwill of $52.3 million, a
decrease in our deferred tax assets of $50.7 million, depreciation and amortization of intangible assets, property and equipment
and marketable securities of $40.5 million, inventory-related charges of $7.7 million and amortization of deferred stock-based
compensation of $3.5 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, a decrease in cash provided by operating activities of discontinued operations of
$21.7 million, and changes to working capital assets and liabilities that increased cash used for operations by
$12.1 million.

Cash used in investing activities was $49.1 million and
$287.3 million in fiscal years 2007 and 2006, respectively, compared to cash provided by investing activities of
$340.8 million in fiscal 2005. Cash used in investing activities in fiscal 2007 was primarily due to purchases of restricted
marketable securities and marketable securities, net of sales and maturities, of $43.9 million and purchases of property and
equipment of $3.7 million. Cash used in investing activities in fiscal 2006 was primarily due to purchases of restricted marketable
securities and marketable securities, net of sales and maturities, of $340.9 million and purchases of property and equipment of
$7.1 million, partially offset by proceeds from the sale of the IBM i/p Series RAID and Systems businesses of $33.6 million
and the sale of the Singapore manufacturing assets of $26.0 million. 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 and proceeds from the sale of long-lived assets of $10.9 million. This was partially offset by our use of cash
for the acquisitions of Snap Appliance and the IBM i/p Series RAID Business of $98.9 million, purchases of property and
equipment of $10.7 million and cash used for investing activities of discontinued operations of $28.8 million.Cash used in financing activities was $3.2 million and
$14.9 million in fiscal years 2007 and 2006, respectively, compared to cash provided by financing activities of $8.5 million
in fiscal 2005. The cash used in financing activities in fiscal years 2007 and 2006 was driven by the repurchase of our 3% Notes for
$10.6 million and $24.3 million, respectively, offset by the issuance of common stock in connection with purchases made under
our employee stock purchase plan and stock option exercises, of $7.4 million and $9.4 million, respectively. 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.Liquidity, Capital Resources and Financial
Condition

At March 31, 2007, we had
$572.4 million in unrestricted cash, cash equivalents and marketable securities, of which approximately $93.8 million was held by
our Singapore and Cayman Licensing subsidiaries. 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. The repatriated amounts
are being used to fund a qualified Domestic Reinvestment Plan, as required by the American Jobs Creation Act of 2004. 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 approximately $255.1 million since we do not have any current plans to repatriate the remaining undistributed earnings from
our foreign subsidiaries 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 in aggregate principal amount of our 3/4% Notes. 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 7 for a detailed discussion
of our debt and equity transactions. At March 31, 2007, we had $225.0 million of aggregate principal amount related to our
3/4% Notes that is due in December 2023. Each holder of the 3/4% Notes may require us to purchase all or a portion of its 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 us to purchase all or a portion of its 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.

We are required to maintain restricted investments to
serve as collateral for the first ten scheduled interest payments on our 3/4% Notes. As of March 31, 2007, we had
$3.2 million of restricted marketable securities, consisting of United States government securities, of which $1.7 million
was classified as short-term and $1.6 million was classified as long-term.

We expect capital expenditures of between
$5 million and $10 million during fiscal 2008, without taking into account any acquisitions.

We were subject to IRS audits for our fiscal years 1994
through 2003. During the third quarter of fiscal 2007, we reached resolution with the United States taxing authorities on all outstanding
audit issues. However, the tax provision continues to reflect judgment and estimation regarding components of the settlement such as
interest calculations and the application of the settlements to state and local taxing jurisdictions.  Although we believe our tax estimates
are reasonable, the ultimate tax outcome may materially differ from the tax amounts recorded in our consolidated financial statements
and may cause a higher effective tax rate that could materially affect our income tax provision, results of operations or cash flows in the
period or periods for which such determination is made.



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 existing 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, 2007.

`Contractual Obligations (in thousands)                      Payments Due By Period
----------------------------------------  ----------------------------------------------------------
                                                         Less                                More
                                                         than                                than
                                            Total       1 year    1-3 years   3-5 years    5 years
                                          ----------  ----------  ----------  ----------  ----------
Long-Term Debt and Associated Interest   $  253,688  $    1,688  $    3,375  $    3,375  $  245,250
Operating Leases                             16,944       6,888       6,378       3,678          --
Purchase Obligations(1)                      19,165      19,165          --          --          --
Other Long-Term Liabilities                     667          --          --          --         667
                                          ----------  ----------  ----------  ----------  ----------
Total                                    $  290,464  $   27,741  $    9,753  $    7,053  $  245,917
                                          ==========  ==========  ==========  ==========  ==========`

________________________

(1)For the purposes of this table, contractual obligations
for the purchase of goods or services are defined as agreements that are enforceable, non-cancelable and legally binding and that
specify all significant terms, including: fixed or minimum quantities to be purchased; fixed, minimum or variable price provisions; and the
approximate timing of the transaction. Our purchase orders are based on our current needs and are fulfilled by our vendors within short
time horizons. The expected timing of payment of the obligations discussed above was estimated based on information available to us
as of March 31, 2007. Timing of payments and actual amounts paid may be different depending on the time of receipt of goods or
services or changes to agreed-upon amounts for some obligations.

We invest in technology companies through two venture
capital funds, Pacven Walden Venture V Funds and APVTechnology
Partners II, L.P. At March 31, 2007, the carrying value of such investments aggregated $2.0 million. We have also
committed to provide additional funding of up to $0.1 million.

Off Balance-Sheet Arrangements

In conjunction with the issuance of the 3/4% Notes 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, 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 our 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 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.

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:

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 is not of salable 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 quantities of 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.

Stock-based compensation:

We use the Black-Scholes option valuation model to value stock awards.  We estimate stock price
volatility based on an average of our historical volatility and the implied volatility derived from traded options on our stock.  Estimated
option life and forfeiture rate assumptions are derived from normalized historical data.  For stock-based compensation awards with
graded vesting that were granted after fiscal 2006, we recognize compensation expense using the straight-line amortization method
over the requisite service period of the awards and adjusted for estimated forfeitures.

Income Taxes:

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 charge included in our tax provision. At March 31, 2007, the valuation allowance against our deferred tax
assets totaled $124.1 million.

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 United States 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 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 assets and liabilities as of March 31, 2007 reflect settlements reached during the fiscal year, which generated a net tax
benefit of $60.2 million in fiscal 2007 and $26.4 million in fiscal 2005. For a discussion of current tax matters, see Note 14
in the Notes to Consolidated Financial Statements.

Major Transactions



Fiscal 2007

Reclassification

We decided to divest our systems business,
including substantially all of the operating assets and cash flows that were obtained through the Snap Appliance and Eurologic Systems
acquisitions, as well as internally developed hardware and software in September 2005. On July 6, 2006, we decided to retain the Snap
Server portion of the systems business and terminated our ongoing efforts to sell this business.  This resulted in the reclassification of
the financial statements and related disclosures for all periods presented to reflect the Snap Server portion of our systems business as
continuing operations effective in the first quarter of fiscal 2007. This included recording an asset impairment charge of $13.2 million
related to certain acquisition-related intangible assets and $0.7 million for legal and consulting fees incurred in connection with our
efforts that had been undertaken to sell the Snap Server portion of our systems business, which was recorded in "Other charges
(gains)" in the Consolidated Statements of Operations in fiscal 2007.

In addition, we reorganized our segments in the first
quarter of fiscal 2007, identifying SSG as a new segment, in addition to our then existing DPS and DSG segments.  Our SSG group
provides storage systems for the protection of both file and block data, which are known as our "Snap Server by Adaptec"
products, including NAS hardware and related backup, replication, and management software. We sell these products to VARs and end
users through our network of distribution partners, solution providers and VARs.

Fiscal 2006

Dispositions

On December 23, 2005, we entered into a
three-year contract manufacturing agreement with Sanmina-SCI whereby Sanmina-SCI, upon the closing of the transaction on
January 9, 2006, assumed manufacturing operations of Adaptec products. In addition, we sold certain manufacturing assets,
buildings and improvements and inventory located in Singapore, with respect to printed circuit board assemblies and storage system
manufacturing operations, to Sanmina-SCI for $26.6 million (net of closing costs of $0.6 million), resulting in a loss on
disposal of assets of $1.6 million that was recorded in "Other charges (gains)" on the Consolidated Statements of
Operations.

On September 30, 2005, we sold our IBM i/p
Series RAID Business to IBM for approximately $22.0 million plus $1.3 million for certain fixed assets. In addition, IBM
purchased certain related inventory at our net book value of $0.8 million. We also granted IBM a nonexclusive license to certain
intellectual property and sold to IBM substantially all of the assets dedicated to the engineering and manufacturing of RAID controllers
and connectivity products for the IBM i/p Series RAID Business. Under the terms of the nonexclusive license, IBM paid us royalties for
the sale of our board-level products on a quarterly basis through March 31, 2007, which were recognized as contingent consideration in
discontinued operations when earned. In fiscal years 2007 and 2006, we received royalties, net of taxes of $7.4 million and
$4.6 million, respectively, which we recorded in "Income (loss) from disposal of discontinued operations, net of taxes,"
in the Consolidated Statements of Operations. In addition, in fiscal 2007, we recorded an additional estimated loss, net of taxes, of $0.8
million related to our facility associated with the IBM i/p Series RAID Business in "Income (loss) from disposal of discontinued
operations, net of taxes" in our Consolidated Statements of Operations.  To the extent that we are unable to sublease this facility
by the end of the lease term, which is June 2010, we may continue to record additional losses in discontinued operations in the future.
Through March 31, 2007, we had recognized a cumulative gain of $4.3 million on the disposal of the IBM i/p Series RAID
Business.

On January 31, 2006, we signed a definitive
agreement with Sanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI USA, Inc., for the sale of our OEM
block-based systems business for $14.5 million, of which $2.5 million will be received by March 2008. In addition,
Sanmina-SCI USA agreed to pay us contingent consideration of up to an additional $12.0 million if certain revenue levels are
achieved over a three-year period. As of March 31, 2007, the revenue levels to achieve this contingent consideration have not been
attained. We recorded a gain of $12.1 million on the disposal of the OEM block-based systems business in the fourth quarter of
fiscal 2006.   In the fourth quarter of fiscal 2007, Sanmina-SCI exercised its put option to return any inventory not used within one year
of the close of the transaction, which resulted in us charging $0.4 million to "Income (loss) from disposal of discontinued
operations, net of taxes" in our Consolidated Statements of Operations.

Fiscal 2005

Acquisitions

During the first quarter of fiscal 2005, we purchased the
IBM i/p Series RAID Business. During the second quarter of fiscal 2005, we purchased Snap Appliance. 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. However, as a result of the
sale of the IBM i/p Series RAID Business, the related operations have been reclassified to "Income (loss) from discontinued
operations, net of taxes" on the Consolidated Statements of Operations, as discussed in Note 2.

IBM i/p Series RAID:

The final purchase price totaled $49.3 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 $0.7 million. This purchase price included a final adjustment of $0.2 million in the first quarter of fiscal
2006 to both goodwill and acquisition costs. 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 had a term of five 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 five years. The transaction costs consisted primarily of legal, valuation and other fees.



Snap Appliance:

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 was recognized as compensation expense over the related vesting periods. In fiscal
2007, with the adoption of SFAS No. 123(R), we reduced the deferred stock-based compensation balance of $0.3 million against
"Additional paid-in capital," which is a separate component of stockholders' equity in the Consolidated Balance Sheets.

In addition, a management incentive program was
established to pay former employees of Snap Appliance cash payments totaling $13.8 million, which was paid over a two-year
period through the second quarter of fiscal 2007. Payments under the management incentive program were expensed as employees
met their employment obligations or were recorded as part of the Snap Appliance acquisition-related restructuring for involuntarily
terminations by us.

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 was held back for a
total of $6.7 million, also referred to as the Snap Appliance Holdback, for unknown liabilities that may have existed as of the
acquisition date. The Snap Appliance Holdback was paid in the second quarter of fiscal 2006, except for funds necessary to provide for
any pending claims, which totaled approximately $3.0 million. In fiscal 2007, we resolved all outstanding claims against the Snap
Appliance Holdback.

Acquisition-Related
Restructuring

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 16). The distribution agreement was 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.  On September 30, 2005, we sold
the IBM i/p Series RAID business to IBM. As a result, the distribution agreement was cancelled as part of the sale.

Recent Accounting Pronouncements

In June 2006, the FASB issued FIN 48, which clarifies
the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109.  FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective beginning with our fiscal 2008. We
are currently assessing the impact, if any, of FIN 48 on our financial position and results of operations.





In September 2006, the FASB issued SFAS No. 157, which defines fair value,
establishes a framework and gives guidance regarding the methods used for measuring fair value, and expands disclosures about fair
value measurements. SFAS No. 157 is effective beginning with our fiscal 2009, and interim periods within those fiscal years. We
are currently evaluating the impact of SFAS No. 157 on our results of operations and financial position.

In February 2007, FASB issued SFAS No. 159, which permits companies to choose to measure certain
financial instruments and certain other items at fair value that are not currently required to be measured at fair value. The standard
requires that unrealized gains and losses on items for which the fair value option has been elected be reported in earnings.
SFAS No. 159 is effective beginning with our fiscal 2010. We are currently evaluating the impact of SFAS No. 159 on our results
of operations and financial position.



Interest Rate Risk

Our exposure to market risk for a change in interest
rates relates primarily to our investment portfolio. As of March 31, 2007, our available-for-sale debt investments, excluding those
classified as cash equivalents, totaled $479.7 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, 2007, 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.

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, 2007, the carrying value of
such investments aggregated $2.0 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 fiscal years presented there was an
immaterial currency exchange impact from our intercompany 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. 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 49
of this Annual Report on Form 10-K for the Consolidated Financial Statements at March 31, 2007 and 2006 and for each of
the three years in the period ended March 31, 2007 and the Report of Independent Registered Public Accounting Firm.







Item 9A. Controls and Procedures

Evaluation of Disclosure Controls and
Procedures

Under the supervision and with the participation of our
management, including our 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 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 (i) is recorded, processed,
summarized and reported within the time periods specified in Securities and Exchange Commission rules and forms and (ii) is
accumulated and communicated to our management, including our CEO and CFO, as appropriate to allow timely decisions regarding
required disclosure.

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

Management assessed the effectiveness of our internal
control over financial reporting as of March 31, 2007, the end of our fiscal year. Management based its assessment on criteria
established in Internal Control-Integrated Framework issued 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, 2007.

Our assessment of the effectiveness of our internal
control over financial reporting as of March 31, 2007 has been audited by PricewaterhouseCoopers LLP, our independent
registered public accounting firm, as stated in their report which is included herein.

Inherent Limitations on Effectiveness of Controls

Our management, including the CEO and CFO, does
not expect that our disclosure controls and procedures or our internal control over financial reporting will prevent or detect all errors 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.





---



PART III



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 our 2007 Annual Meeting of Stockholders 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 Item 4A of Part I of this Annual Report on
Form 10-K under the heading "Executive Officers." Information regarding the Audit Committee of our Board of
Directors and our Audit Committee financial expert is incorporated by reference from the information under the caption: "Proposal
No. 1 - Election of Directors" from the Proxy Statement.

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 web site at www.adaptec.com/en-US/company/about/. 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.

There were no material changes to the procedures by
which our stockholders may recommend nominees to our Board of Directors implemented during fiscal 2007.



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 the
Proxy Statement.



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. Information with respect to the Compensation Committee of our Board of Directors is incorporated by reference from the
information under the caption: "Proposal No. 1 - Election of Directors" and "Compensation Committee Interlocks and
Insider Participation" from the Proxy Statement.



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: "Transactions with Related Persons" in our Proxy Statement. Information regarding director
independence is incorporated by reference from the information under the caption: "Proposal No. 1 - Election of Directors"
from the Proxy Statement.



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. 2 - Ratification of Appointment of Independent Registered Public Accounting Firm" and "Fees Paid to
PricewaterhouseCoopers" in the Proxy Statement.

PART IV



(a)   The following documents are filed as a part of this Annual Report on Form 10-K:

1. Index to Financial Statements

Report of Independent Registered Public Accounting FirmConsolidated Statements of OperationsConsolidated Balance SheetsConsolidated Statements of Cash FlowsConsolidated Statements of Stockholders' EquityNotes to Consolidated Financial Statements

2. Financial Statement Schedule

Schedule II Valuation and Qualifying Accounts

3. Exhibits

The exhibits listed in the accompanying index to exhibits, which follows the signature page, are filed or
incorporated by reference as part of this Annual Report on Form 10-K.

(b)



(c)



---







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

We have completed integrated audits of
Adaptec, Inc.'s consolidated financial statements and of its internal control over financial reporting as of March 31, 2007, 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, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in
the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In
addition, in our opinion, the financial statement schedule 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, 2007 based on criteria established in Internal
Control-Integrated Framework issued 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, 2007, based on criteria established in Internal Control-Integrated
Framework issued 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 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



---



ADAPTEC, INC.
CONSOLIDATED STATEMENTS OF OPERATIONS

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                  (in thousands, except per share amounts)
Net revenues                                                     $    255,208  $    344,142  $    402,516
Cost of revenues                                                      173,974       230,249       240,314
                                                                  ------------  ------------  ------------
Gross profit                                                           81,234       113,893       162,202
                                                                  ------------  ------------  ------------
Operating expenses:
Research and development                                               56,573        68,179        93,243
Selling, marketing and administrative                                  61,325        72,376        78,686
Amortization of acquisition-related intangible assets                   5,996         9,234        12,195
Write-off of acquired in-process technology                                --            --         2,200
Restructuring charges                                                   3,711        10,430         5,896
Goodwill impairment                                                        --        90,602        52,272
Other charges (gains)                                                  14,700        11,603          (290)
                                                                  ------------  ------------  ------------
Total operating expenses                                              142,305       262,424       244,202
                                                                  ------------  ------------  ------------
Loss from continuing operations                                       (61,071)     (148,531)      (82,000)
Interest and other income                                              25,618        17,621         8,369
Interest expense                                                       (3,405)       (3,314)       (4,439)
                                                                  ------------  ------------  ------------
Loss from continuing operations before income taxes                   (38,858)     (134,224)      (78,070)
Provision for (benefit from) income taxes                             (63,704)        1,608        51,575
                                                                  ------------  ------------  ------------
Income (loss) from continuing operations                               24,846      (135,832)     (129,645)
                                                                  ------------  ------------  ------------
Discontinued operations, net of taxes:
Loss from discontinued operations, net of taxes                          (546)      (22,410)      (15,461)
Income from disposal of discontinued operations, net of taxes           6,543         9,810            --
                                                                  ------------  ------------  ------------
Income (loss) from discontinued operations, net of taxes                5,997       (12,600)      (15,461)
                                                                  ------------  ------------  ------------
Net income (loss)                                                $     30,843  $   (148,432) $   (145,106)
                                                                  ============  ============  ============

Income (loss) per share:
    Basic:
        Continuing operations                                    $       0.21  $      (1.20) $      (1.17)
        Discontinued operations                                  $       0.05  $      (0.11) $      (0.14)
        Net income (loss)                                        $       0.26  $      (1.31) $      (1.31)
    Diluted:
        Continuing operations                                    $       0.20  $      (1.20) $      (1.17)
        Discontinued operations                                  $       0.04  $      (0.11) $      (0.14)
        Net income (loss)                                        $       0.25  $      (1.31) $      (1.31)

Shares used in computing income (loss) per share:
    Basic                                                             116,602       113,405       110,798
    Diluted                                                           136,690       113,405       110,798`

See accompanying Notes to the Consolidated
Financial Statements.

---

ADAPTEC, INC.CONSOLIDATED
BALANCE SHEETS

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                   (in thousands, except
                                                                     per share amounts)
Assets                                                                                                  
Current assets:
Cash and cash equivalents                                         $    95,922  $   131,373
Marketable securities                                                 476,501      425,179
Restricted marketable securities                                        1,660        1,663
Accounts receivable, net of allowance for doubtful accounts
    of $519 in 2007 and $814 in 2006                                   34,127       47,876
Inventories                                                            28,717       28,259
Prepaid expenses                                                        1,403        2,790
Other current assets                                                   30,429       23,504
Assets held for sale                                                   12,509           --
                                                                   -----------  -----------
Total current assets                                                  681,268      660,644
Property and equipment, net                                            15,852       30,665
Restricted marketable securities, less current portion                  1,584        3,086
Other intangible assets, net                                            7,011       32,524
Other long-term assets                                                  9,687       10,480
                                                                   -----------  -----------
Total assets                                                      $   715,402  $   737,399
                                                                   ===========  ===========             
Liabilities and Stockholders' Equity                                                                    
Current liabilities:
Accounts payable                                                  $    28,101  $    40,246
Accrued liabilities                                                    37,134       87,722
3% Convertible Subordinated Notes ("3% Notes")                             --       10,637
                                                                   -----------  -----------
Total current liabilities                                              65,235      138,605

3/4% Convertible Senior Subordinated Notes ("3/4% Notes")             225,000      225,000
Other long-term liabilities                                             3,009        4,349
Commitments and contingencies (Note 9)

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, 118,856 as of
    March 31, 2007 and 115,467 as of March 31, 2006                       119          115
Additional paid-in capital                                            190,236      174,648
Deferred stock-based compensation                                          --         (319)
Accumulated other comprehensive income (loss), net of taxes             3,178       (2,781)
Retained earnings                                                     228,625      197,782
                                                                   -----------  -----------
Total stockholders' equity                                            422,158      369,445
                                                                   -----------  -----------
Total liabilities and stockholders' equity                        $   715,402  $   737,399
                                                                   ===========  ===========`

See accompanying Notes to Consolidated Financial
Statements.

---

ADAPTEC, INC.CONSOLIDATED
STATEMENTS OF CASH FLOWS

`Years Ended March 31,
                                                                               -------------------------------
                                                                                 2007       2006       2005
                                                                               ---------  ---------  ---------
                                                                                          (in thousands)
Cash Flows From Operating Activities:                                                                         
Net income (loss)                                                             $  30,843  $(148,432) $(145,106)
Less: Income (loss) from discontinued operations, net of taxes                    5,997    (12,600)   (15,461)
                                                                               ---------  ---------  ---------
Income (loss) from continuing operations                                         24,846   (135,832)  (129,645)
Adjustments to reconcile income (loss) from continuing operataions to net cash
provided by (used for) operating activities:
Stock-based compensation                                                          8,473      1,653      3,525
Write-off of acquired in-process technology                                          --         --      2,200
Inventory-related charges                                                        12,942     10,671      7,686
Loss (gain) on the sale of long-lived assets                                         --      1,579     (1,359)
Impairment of goodwill                                                               --     90,602     52,272
Impairment of intangible assets                                                  13,203     10,024         --
Non-cash effect of tax settlement                                               (60,221)        --    (26,009)
Loss on extinguishment of debt                                                       --         80         --
Depreciation and amortization                                                    17,326     25,887     40,501
Deferred income taxes                                                                --         --     50,739
Income tax benefits (provision) of employees' stock transactions                     --         --       (616)
Other non-cash items                                                              1,688      1,267         73
Changes in assets and liabilities (net of acquired businesses):
Accounts receivable                                                              12,745     22,289    (12,546)
Inventories                                                                      (8,622)     8,003    (25,773)
Prepaid expenses and other current assets                                        18,794     (5,354)    15,710
Other assets                                                                    (12,038)      (419)      (956)
Accounts payable                                                                (11,442)   (21,366)    25,112
Other liabilities                                                               (10,125)   (22,245)    10,559
                                                                               ---------  ---------  ---------
Net Cash Provided by (Used in) Operating Activities of Continuing Operations      7,569    (13,161)    11,473
Net Cash Provided by (Used in) Operating Activities of Discontinued Operations    7,239      6,051    (21,730)
                                                                               ---------  ---------  ---------
Net Cash Provided by (Used in) Operating Activities                              14,808     (7,110)   (10,257)
                                                                               ---------  ---------  ---------
Cash Flows From Investing Activities:                                                                         
Payment of holdbacks in connection with acquisitions of Platys and Eurologic     (1,507)        --     (2,279)
Purchases of businesses, net of cash acquired                                        --         --    (98,862)
Maturities of restricted marketable securities                                    1,688      1,688      2,736
Purchases of property and equipment                                              (3,733)    (7,058)   (10,718)
Proceeds from the sale of the IBM i/p and systems business                           --     33,630         --
Proceeds from the sale of the Singapore manufacturing assets                         --     25,986         --
Proceeds from sale of long-lived assets                                              --      2,684     10,877
Purchases of marketable securities                                             (301,524)  (596,866)  (328,167)
Sales of marketable securities                                                  209,116    217,186    718,009
Maturities of marketable securities                                              46,846     37,090     77,997
                                                                               ---------  ---------  ---------
Net Cash Provided by (Used in) Investing Activities of Continuing Operations    (49,114)  (285,660)   369,593
Net Cash Used in Investing Activities of Discontinued Operations                     --     (1,655)   (28,751)
                                                                               ---------  ---------  ---------
Net Cash Provided by (Used in) Investing Activities                             (49,114)  (287,315)   340,842
                                                                               ---------  ---------  ---------
Cash Flows From Financing Activities:                                                                         
Repurchases and redemption on long-term debt                                    (10,637)   (24,309)        --
Proceeds from the issuance of common stock                                        7,438      9,388      8,503
                                                                               ---------  ---------  ---------
Net Cash Provided by (Used in) Financing Activities                              (3,199)   (14,921)     8,503
                                                                               ---------  ---------  ---------
Effect of foreign currency translation on cash and cash equivalents               2,054       (869)        37
                                                                               ---------  ---------  ---------
Net Increase (Decrease) in Cash and Cash Equivalents                            (35,451)  (310,215)   339,125
Cash and Cash Equivalents at Beginning of Year                                  131,373    441,588    102,463
                                                                               ---------  ---------  ---------
Cash and Cash Equivalents at End of Year                                      $  95,922  $ 131,373  $ 441,588
                                                                               =========  =========  =========`

See accompanying Notes to Consolidated Financial
Statements.

---



ADAPTEC, INC.CONSOLIDATED
STATEMENTS OF STOCKHOLDERS' EQUITY

`Additional
                                                 Common Stock       Additional   Deferred       Other
                                              --------------------   Paid-in   Stock-based   Comprehensive Retained
                                               Shares     Amount     Capital   Compensation  Income (Loss) Earnings     Total
                                              ---------  ---------  ---------  ------------  ------------  ---------  ---------
                                                                               (in thousands)                                  
Balance, March 31, 2004                        109,810  $     110  $ 153,174  $     (2,713) $      3,000  $ 491,320  $ 644,891
Components of comprehensive loss:
Net loss                                            --         --         --            --            --   (145,106)  (145,106)
Unrealized loss on available-for-sale
investments, net of taxes                           --         --         --            --        (2,732)        --     (2,732)
Foreign currency translation
adjustment, net of taxes                            --         --         --            --           438         --        438
                                                                                                                      ---------
Total comprehensive loss, net of taxes                                                                                (147,400)
                                                                                                                      ---------
Sale of common stock under employee
stock purchase and option plans                  2,514          1      8,502            --            --         --      8,503
Income tax provision of employees'
stock transactions                                  --         --       (616)           --            --         --       (616)
Issuance of restricted stock                        15          1        117          (118)           --         --         --
Issuance of common stock in connection
 with acquisition                                   --         --      3,464            --            --         --      3,464
Deferred stock-based compensation                                      3,598        (3,598)           --         --         --
Amortization of deferred
stock-based compensation                            --         --         75         3,450            --         --      3,525
Adjustment of deferred
stock-based compensation                            --         --       (563)          563            --         --         --
Issuance of warrant in
connection with acquisition                         --         --      2,024            --            --         --      2,024
Non-cash tax settlement                             --         --     (4,068)           --            --         --     (4,068)
                                              ---------  ---------  ---------  ------------  ------------  ---------  ---------
Balance, March 31, 2005                        112,339        112    165,707        (2,416)          706    346,214    510,323
Components of comprehensive loss:
Net loss                                            --         --         --            --            --   (148,432)  (148,432)
Unrealized loss on available-for-sale
investments, net of taxes                           --         --         --            --        (2,687)        --     (2,687)
Foreign currency translation
adjustment, net of taxes                            --         --         --            --          (800)        --       (800)
                                                                                                                      ---------
Total comprehensive loss, net of taxes                                                                                (151,919)
                                                                                                                      ---------
Sale of common stock under employee
stock purchase and option plans                  3,131          3      9,385            --            --         --      9,388
Amortization of deferred
stock-based compensation                            --         --         --         1,653            --         --      1,653
Adjustment of deferred
stock-based compensation                            (3)        --       (444)          444            --         --         --
                                              ---------  ---------  ---------  ------------  ------------  ---------  ---------
Balance, March 31, 2006                        115,467        115    174,648          (319)       (2,781)   197,782    369,445
Components of comprehensive income:
Net income                                          --         --         --            --            --     30,843     30,843
Unrealized gain on available-for-sale
investments, net of taxes                           --         --         --            --         3,792         --      3,792
Foreign currency translation
adjustment, net of taxes                            --         --         --            --         2,167         --      2,167
                                                                                                                      ---------
Total comprehensive income, net of taxes                                                                                36,802
                                                                                                                      ---------
Sale of common stock under employee
stock purchase and option plans                  3,389          4      7,434            --            --         --      7,438
Adjustment to stock-based compensation              --         --       (319)          319            --         --         --
Stock-based compensation                            --         --      8,473            --            --         --      8,473
                                              ---------  ---------  ---------  ------------  ------------  ---------  ---------
Balance, March 31, 2007                        118,856  $     119  $ 190,236  $         --  $      3,178  $ 228,625  $ 422,158
                                              =========  =========  =========  ============  ============  =========  =========`

See accompanying Notes to the Consolidated
Financial Statements.

---

ADAPTEC, INC.
NOTES TO CONSOLIDATED FINANCIAL STATEMENTS

Note 1. Summary of Significant Accounting
Policies

Description

Adaptec, Inc. ("Adaptec" or the
"Company") provides storage solutions that reliably move, manage and protect critical data and digital content. The
Company delivers software and hardware components that provide reliable storage connectivity and advanced data protection to
leading OEMs and through distribution channel partners. The Company's software and hardware products range from HBAs, RAID
controllers, host RAID software, Adaptec RAID Code software, Advanced Data Protection software, Storage Management software,
Snapshot software and other solutions that span SCSI, SAS, SATA, and iSCSI interface technologies. The Company's Snap Servers
offer NAS solutions for both fixed capacity and future scalability. System integrators and white box suppliers build server and storage
solutions based on Adaptec technology in order to deliver products with superior price and performance, data protection and
interoperability.

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 key acronyms used in the Company's
industry and accounting rules and regulations referred to within the Notes to the Consolidated Financial Statements are listed in
alphabetical order in Note 21.

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 determine whether a valuation allowance is required related to net deferred tax assets, inventory
reserves, impairments of long-lived assets, and the valuation and recognition of stock-based awards. 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 actual results could differ from such estimates
resulting in the need for a valuation allowance for net deferred tax assets, inventory reserve charges, the valuation and recognition of
stock-based awards or other charges.

Certain reclassifications have been made to prior period
reported amounts to conform to the current year presentation, including reclassification of discontinued operations as discussed in
Note 2. These reclassifications had no impact on net income (loss), total assets or total stockholders' equity. On
September 30, 2005, the Company completed the sale to International Business Machines ("IBM") of its IBM i/p
Series RAID component business ("IBM i/p Series RAID Business"), and in September 2005, the Company decided
to divest its systems business, which included substantially all of the operating assets and cash flows that were obtained through the
Company's acquisition of Snap Appliance, Inc. in fiscal 2005 and Eurologic Systems Group
Limited in fiscal 2004 as well as internally generated hardware and software. In January 2006, the Company sold the OEM block-based
portion of its systems business to Sanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI USA, Inc. In July 2006, and
effective for the end of the first quarter of fiscal 2007, the Company decided to retain the Snap Server portion of the systems business
and terminated its ongoing efforts to sell this business. As a result, the IBM i/p Series RAID Business and the OEM block-based portion
of its systems business have been accounted for as discontinued operations. Accordingly, the Company has reclassified the financial
statements and related disclosures for all periods presented to reflect both of these businesses as discontinued operations.

Unless otherwise indicated, the Notes to the
Consolidated Financial Statements relate to the discussion of the Company's continuing operations.

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, 2007, 2006 and 2005. The Company does not
hold or issue foreign exchange contracts for trading or speculative purposes. In connection with
the issuance of its 3/4% Notes due 2023, 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 7 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 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, 2007           March 31, 2006
                                                    -----------------------  -----------------------
                                                                 Estimated                Estimated
                                                       Cost         Fair        Cost        Fair
                                                       Basis       Value       Basis        Value
                                                    -----------  ----------  ----------  -----------
                                                                     (in thousands)                 
3/4% Notes                                         $   225,000  $  204,750  $  225,000  $   195,188
3% Notes                                                    --          --      10,637       10,527
                                                    -----------  ----------  ----------  -----------
Total                                              $   225,000  $  204,750  $  235,637  $   205,715
                                                    ===========  ==========  ==========  ===========`

Cash Equivalents and Marketable Securities

Cash equivalents consist of highly liquid investments
with remaining 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 remaining 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 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 the indenture related to the 3/4% Notes (Note 7).

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. 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.

Four customers accounted for 23%, 22%, 11% and 11%
of gross accounts receivable at March 31, 2007. Two customers accounted for 28% and 18% of gross accounts receivable at
March 31, 2006. In fiscal 2007, IBM and Dell accounted for 34% and 13% of total net revenues, respectively. In fiscal 2006, IBM
and Dell accounted for 28% and 15% of total net revenues, respectively. In fiscal 2005, IBM and Dell accounted for 24% and 14% of
total net revenues, respectively.

The Company currently purchases the majority of its
finished products from Sanmina-SCI and if Sanmina- SCI fails to meet the Company's manufacturing needs, it would delay product
shipments to the Company's customers.

The industry in which the Company operates 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. The Company writes down inventories based on estimated excess and
obsolete inventories determined primarily by future demand forecasts. At the point of loss recognition, a new, lower cost basis for that
inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly
established cost 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. Goodwill is reviewed
annually and whenever events or circumstances occur which indicate that goodwill might be impaired. 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. 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.

Impairment of Long-Lived Assets



Stock-Based Compensation

The Company has employee and director stock
compensation plans which are more fully described in Note 8. Beginning in fiscal 2007, the Company accounts for stock-based
compensation in accordance with SFAS No. 123(R) using the modified prospective transition method. Under SFAS No. 123(R), the
Company measures and recognizes compensation expense for all stock-based awards made to its employees and directors, including
employee stock options, employee stock purchase plans, and other stock-based awards, based on estimated fair values. In addition,
the Company also adopted the alternative transition method provided in FSP No. 123(R)-3 for calculating the effects of share-based
compensation pursuant to SFAS No. 123(R), which included a simplified method to establish the beginning balance of the additional
paid in capital pool related to the tax effects of employee stock-based compensation, which is available to absorb tax deficiencies
recognized subsequent to the adoption of SFAS No. 123(R). Prior to fiscal 2007, the Company accounted for stock-based
compensation in accordance with APB Opinion No. 25 as interpreted by FIN 44, and complied with the disclosure provisions of
SFAS No. 148, an amendment of SFAS No. 123. Under APB Opinion No. 25, compensation expense was
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.  In addition, the Company also accounted for equity instruments issued to
non-employees in accordance with the provisions of SFAS No. 123 and EITF No. 96-18, which required that such equity
instruments be recorded at their fair value on the measurement date, which is typically the date of grant. Disclosures related to the
Company's adoption of SFAS No. 123(R) and disclosure provision of SFAS No. 148 are discussed further in Note 8.

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.

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 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, 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.

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, 2007, 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. 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 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 June 2006, the FASB issued FIN 48, which clarifies
the accounting for uncertainty in income taxes recognized in a company's financial statements in accordance with SFAS No. 109. FIN
48 prescribes a recognition threshold and measurement attribute for the financial statement recognition and measurement of a tax
position taken or expected to be taken in a tax return. This interpretation also provides guidance on derecognition, classification,
interest and penalties, accounting in interim periods, disclosure, and transition. FIN 48 is effective beginning with the Company's fiscal
2008.  The Company is currently assessing the impact, if any, of FIN 48 on its financial position and results of operations.





In September 2006, the FASB issued SFAS
No. 157, which defines fair value, establishes a framework and gives guidance regarding the methods used for measuring fair
value, and expands disclosures about fair value measurements. SFAS No. 157 is effective beginning with the Company's fiscal
2009, and interim periods within those fiscal years. The Company is currently evaluating the impact of SFAS No. 157 on its results of
operations and financial position.

In February 2007, FASB issued SFAS No. 159,
which permits companies to choose to measure certain financial instruments and certain other items at fair value that are not currently
required to be measured at fair value. The standard requires that unrealized gains and losses on items for which the fair value option
has been elected be reported in earnings. SFAS No. 159 is effective beginning with the Company's fiscal 2010. The Company is
currently evaluating the impact of SFAS No. 159 on its results of operations and financial position.

Note 2. Discontinued Operations

IBM i/p Series RAID Business:

On September 30, 2005, the Company entered into a series of arrangements with IBM pursuant to
which the Company sold its IBM i/p Series RAID Business to IBM for approximately $22.0 million plus $1.3 million for
certain fixed assets. In addition, IBM purchased certain related inventory at the Company's net book value of $0.8 million.
Expenses incurred in the transaction primarily included costs of approximately $0.5 million for legal and accounting fees. In
addition, the Company accrued $0.3 million for lease obligations. Under the terms of the agreements, the Company granted IBM
a nonexclusive license to certain intellectual property and sold to IBM substantially all of the assets dedicated to the engineering and manufacturing of RAID controllers and connectivity products for the IBM i/p Series
RAID Business. Under the terms of the nonexclusive license, IBM paid royalties to the Company for the sale of its board-level products
on a quarterly basis through March 31, 2007, which were recognized as contingent consideration in discontinued operations when
earned. In fiscal years 2007 and 2006, the Company received royalties, net of taxes, of $7.4 million and $4.6 million, respectively,
which the Company recorded in "Income (loss) from disposal of discontinued operations, net of taxes," in the Consolidated
Statements of Operations. In addition, in fiscal 2007, the Company recorded an additional estimated loss, net of taxes, of $0.8 million
related to its facility associated with the IBM i/p Series RAID Business in "Income (loss) from disposal of discontinued operations,
net of taxes" in its Consolidated Statements of Operations.  To the extent that the Company is unable to sublease this facility by
the end of the lease term, which is June 2010, the Company may continue to record additional losses in discontinued operations in the
future. Through March 31, 2007, the Company had recognized a cumulative gain of $4.3 million on the disposal of the IBM
i/p Series RAID Business.

Net revenues and the components of loss related to the
IBM i/p Series RAID business included in discontinued operations, which were previously included in the Company's DPS segment,
were as follows:

`Years Ended March 31,
                                                                 ----------------------
                                                                    2006        2005
                                                                 ----------  ----------
                                                                      (in thousands)                
Net revenues                                                    $   19,734  $   26,583
                                                                 ==========  ==========
Loss from discontinued operations before income taxes           $  (14,551) $  (10,728)
Provision for (benefit from) income taxes                             (360)      1,110
                                                                 ----------  ----------
Loss from discontinued operations, net of taxes                 $  (14,191) $  (11,838)
                                                                 ==========  ==========`

The components of net assets, at the time of the sale of
the IBM i/p Series RAID Business, were as follows (in thousands):

`Inventories                                                                 $      838
Prepaid expenses                                                                11,139
Property and equipment, net                                                      3,326
Other intangibles, net                                                          10,958
Other long-term assets                                                          24,507
Accrued liabilities                                                            (10,051)
Other long-term liabilities                                                    (10,625)
                                                                             ----------
Net assets of discontinued operations                                       $   30,092
                                                                             ==========`

Accounts receivable related to the IBM i/p
Series RAID Business were not included in discontinued operations as the Company retained these assets.

Systems Business:

On September 29, 2005, the Company decided to
divest its systems business, including substantially all of the operating assets and cash flows that were obtained through the Snap
Appliance and Eurologic Systems acquisitions as well as internally developed hardware and software. Accordingly, the Company
classified the systems business as a discontinued operation in the consolidated financial statements for the three-year period ended
March 31, 2006 and began pursuing a sale of the systems business.

On January 31, 2006, the Company signed a
definitive agreement with Sanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI USA, Inc., for the sale of the
Company's OEM block-based portion of its systems business for $14.5 million, of which $2.5 million will be received by
March 2008. In addition, Sanmina-SCI USA agreed to pay the Company contingent consideration of up to an additional
$12.0 million if certain revenue levels are achieved over a three-year period. As of March 31, 2007, the revenue levels to achieve
this contingent consideration have not been attained. The Company recorded a gain of $12.1 million on the disposal of the OEM
block-based systems business in the fourth quarter of fiscal 2006. In the fourth quarter of fiscal 2007, Sanmina-SCI exercised its put
option to return any inventory not used within one year of the close of the transaction, which resulted in the Company charging $0.4
million to "Income (loss) from discontinued operations, net of taxes" in its Consolidated Statements of Operations.

In the fourth quarter of fiscal 2006, the Company
recorded asset impairment charges of $10.0 million related to certain acquisition-related intangible assets (Note 5) for the Snap Server
portion of its systems business that was previously held for sale at March 31, 2006, to adjust the carrying value of these assets to fair
value, which was aligned to the offers being negotiated.

The Company received offers from prospective buyers
for the Snap Server portion of its systems business; however, management concluded that the potential value from retaining the
operations outweighed the offers received for the business.  As a result, on July 6, 2006, the Company decided to retain the Snap
Server portion of the systems business and terminated its ongoing efforts to sell this business. This resulted in the reclassification of the
financial statements and related disclosures for all periods presented to reflect the Snap Server portion of its systems business as
continuing operations effective in the first quarter of fiscal 2007. In addition, the Company recorded asset impairment charges of $13.2
million related to certain acquisition-related intangible assets (Note 5) and $0.7 million for legal and consulting fees incurred in
connection with its efforts that had been undertaken to sell the Snap Server portion of its systems business, which was recorded in
"Other charges (gains)" in the Consolidated Statements of Operations in fiscal 2007.

Net revenues and the components of income (loss)
related to the OEM block-based portion of the Company's systems business included in the discontinued operations, were as
follows:

`Years Ended March 31,
                                                    -----------------------------------
                                                     2007 (1)       2006        2005
                                                    -----------  ----------  ----------
                                                                 (in thousands)                     
Net revenues                                       $     2,036  $   31,723  $   45,891
                                                    ===========  ==========  ==========
Loss from discontinued operations before provision
for income taxes                                   $      (529) $   (8,219)     (3,623)
Provision for income taxes                                  17          --          --
                                                    -----------  ----------  ----------
Loss from discontinued operations, net of taxes    $      (546) $   (8,219) $   (3,623)
                                                    ===========  ==========  ==========`

________________________

(1) The Company received revenue from one customer that remained with the Company after the divestiture of the OEM block-
based systems business.

The components of net assets, at the time of the sale of
the Company's OEM block-based portionof its systems business, were
as follows (in thousands):

`Inventories                                                                        363
Property and equipment, net                                                        975
Other intangibles, net                                                             654
Accrued liabilities                                                                (48)
                                                                             ----------
    Net assets of discontinued operations                                   $    1,944
                                                                             ==========`

Accounts receivable related to the OEM block-based
portion of the systems business have not been included in the assets of discontinued operations, as the Company retained these
assets.



The Company's portfolio of marketable securities,
including restricted marketable securities, at March 31, 2007 was as follows:

`Gross       Gross      Estimated
                                                                 Unrealized  Unrealized     Fair
                                                       Cost        Gains       Losses       Value
                                                    -----------  ----------  ----------  -----------
                                                                     (in thousands)
Available-for-Sale Marketable Securities:                                                           
Short-term deposits                                $    13,370  $       --  $       --       13,370
Corporate obligations                                  170,269          88        (409)     169,948
United States government securities                    102,061         138        (349)     101,850
Other debt securities                                  215,233       1,459        (308)     216,384
                                                    -----------  ----------  ----------  -----------
Total available-for-sale securities                    500,933       1,685      (1,066)     501,552
Less: amounts classified as cash equivalents            21,807          --          --       21,807
                                                    -----------  ----------  ----------  -----------
Total                                              $   479,126  $    1,685  $   (1,066)     479,745
                                                    ===========  ==========  ==========  ===========`

The Company's portfolio of marketable securities, including restricted marketable securities at March 31, 2006 was as follows:

`Gross       Gross      Estimated
                                                                 Unrealized  Unrealized     Fair
                                                       Cost        Gains       Losses       Value
                                                    -----------  ----------  ----------  -----------
                                                                     (in thousands)
Available-for-Sale Marketable Securities:                                                           
Short-term deposits                                $    44,278  $       --  $       --       44,278
Corporate obligations                                  146,388          --      (1,562)     144,826
United States government securities                    118,564          --      (1,254)     117,310
Other debt securities                                  171,757         643      (1,096)     171,304
                                                    -----------  ----------  ----------  -----------
Total available-for-sale securities                    480,987         643      (3,912)     477,718
Less: amounts classified as cash equivalents            47,792          --          (2)      47,790
                                                    -----------  ----------  ----------  -----------
Total                                              $   433,195  $      643  $   (3,910)     429,928
                                                    ===========  ==========  ==========  ===========`

Sales of marketable securities resulted in gross realized
gains of $0.2 million, $0.1 million and $0.6 million during fiscal years 2007, 2006 and 2005, respectively. Sales of
marketable securities resulted in gross realized losses of $0.6 million, $0.7 million and $5.9 million during fiscal years
2007, 2006 and 2005, 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
marketable securities held by its Singapore subsidiary resulting in gross realized losses of $4.5 million.

The following table summarizes the fair value and gross
unrealized losses of the Company's 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, 2007:

`Less than 12 Months     12 Months or Greater          Total
                           ----------------------  ----------------------  --------------------
                                         Gross                   Gross                  Gross
                              Fair     Unrealized     Fair     Unrealized    Fair     Unrealized
                             Value       Losses      Value       Losses      Value     Losses
                           ----------  ----------  ----------  ----------  ---------  ---------
                                                       (in thousands)                          
Corporate obligations     $   57,049  $      (77) $   70,189  $     (332) $ 127,238  $    (409)
United States
government securities         11,164         (35)     42,428        (314)    53,592       (349)
Other debt securities         45,362         (84)     38,465        (224)    83,827       (308)
                           ----------  ----------  ----------  ----------  ---------  ---------
                          $  113,575  $     (196) $  151,082  $     (870) $ 264,657  $  (1,066)
                           ==========  ==========  ==========  ==========  =========  =========`

The Company's 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.
The Company expects 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, 2007, by contractual maturity, were as follows:

`Available-for-Sale
                                                Debt Securities      Estimated
                                                      Cost          Fair Value
                                               ------------------  --------------
                                                           (in thousands)        
Mature in one year or less                    $          240,531  $      241,123
Mature after one year through three years                260,402         260,429
                                               ------------------  --------------
                                              $          500,933  $      501,552
                                               ==================  ==============`

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



Inventories

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
Raw materials                                                     $       390  $     4,258
Work-in-process                                                         3,536        4,732
Finished goods                                                         24,791       19,269
                                                                   -----------  -----------
Total                                                             $    28,717  $    28,259
                                                                   ===========  ===========`



Property and Equipment



`March 31,
                                                                                ------------------------
                                                                      Life         2007         2006
                                                                   -----------  -----------  -----------
                                                                                    (in thousands)      
Land                                                                       --  $     2,855  $     8,443
Buildings and improvements                                          5-40 years      13,090       28,646
Machinery and equipment                                              3-5 years      47,627       50,731
Furniture and fixtures                                               3-7 years      43,467       55,950
                                                       Lower of useful life or
Leasehold improvements                                           life of lease       5,181        5,840
                                                                                -----------  -----------
                                                                                   112,220      149,610
Accumulated depreciation and amortization                                          (96,368)    (118,945)
                                                                                -----------  -----------
Total                                                                          $    15,852  $    30,665
                                                                                ===========  ===========`



Accrued Liabilities



`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
Tax related                                                       $     9,590  $    46,704
Acquisition related                                                     2,123        3,635
Accrued compensation and related taxes                                  7,672       16,235
Deferred margin                                                         5,265        6,156
Other                                                                  12,484       14,992
                                                                   -----------  -----------
Total                                                             $    37,134  $    87,722
                                                                   ===========  ===========`

Accumulated Other Comprehensive Income (Loss)



`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
Unrealized loss on marketable securities, net of tax
of $- in fiscal 2007 and $- in fiscal 2006                        $       559  $    (3,233)
Foreign currency translation, net of tax of $- in
fiscal 2007 and $- in fiscal 2006                                        2619          452
                                                                   -----------  -----------
Total                                                             $     3,178  $    (2,781)
                                                                   ===========  ===========`

Note 5. Goodwill and Other Intangible
Assets



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 Company's operating 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
segment exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of
impairment loss, if any.

In connection with the reorganization of the Company's
segments in fiscal 2006, an assessment of the recoverability of goodwill was performed. As a result of this review, the Company wrote-
off its entire balance of goodwill of $90.6 million in the second quarter of fiscal 2006.  Factors that led to this conclusion included, but
were not limited to, industry technology changes such as the shift from parallel to serial technology and the migration of core
functionality to server chipsets; required increased investments that eventually led the Company to sell the IBM i/p Series RAID
Business in fiscal 2007 and the decision to sell the systems business; continued losses associated with sales of systems to IBM; and
general market conditions.

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 former 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 acquisitions and business alliances that occurred in fiscal 2005. These additional costs,
along with industry technology transitions, placed significant risk on the Company's ability to achieve and maintain profitability, and,
therefore adversely impacted its profitability forecasts.



`March 31, 2007                    March 31, 2006
                                            --------------------------------  --------------------------------
                                            Gross Carrying     Accumulated    Gross Carrying     Accumulated
                                                Amount        Amortization        Amount        Amortization
                                            ---------------  ---------------  ---------------  ---------------
                                                                        (in thousands)                        
Acquisition-related intangible assets:
Patents, core and existing technologies    $        43,545  $       (38,539) $        43,545  $       (24,218)
Customer relationships                               1,047           (1,034)           1,047             (773)
Trade names                                         10,774          (10,474)          10,774           (5,858)
                                            ---------------  ---------------  ---------------  ---------------
Subtotal                                            55,366          (50,047)          55,366          (30,849)
Intellectual property assets and warrants           40,242          (38,550)          40,242          (32,235)
                                            ---------------  ---------------  ---------------  ---------------
Total                                      $        95,608  $       (88,597) $        95,608  $       (63,084)
                                            ===============  ===============  ===============  ===============`

Intellectual property assets consist of a patent license
fee (Note 16), a technology license fee (Note 16) and an amount allocated to a product supply agreement (Note 16).
Amortization of other intangible assets was $12.3 million, $15.8 million and
$20.2 million in fiscal years 2007, 2006 and 2005, respectively.



The Company regularly performs reviews to determine if facts or circumstances are present, either internal or
external, which would indicate that the carrying values of its long-lived assets are impaired. If an asset is determined to be impaired, the
loss is measured based on the difference between the asset's fair value and its carrying value. The estimate of fair value of the assets
is based on discounting estimated future cash flows using a discount rate commensurate with the risks inherent in the Company's
current business model. The estimation of the impairment involves numerous assumptions that require judgment by the Company,
including, but not limited to, future use of the assets for the Company's operations versus sale or disposal of the assets and future
selling prices for the Company's products.

In the fourth quarter of fiscal 2006, the Company
recorded asset impairment charges of $10.0 million related to certain acquisition-related intangible assets for the Snap Server portion of
its systems business that was previously held for sale at March 31, 2006 to adjust the carrying value of these assets to fair value, which
was aligned to the offers made by potential purchasers. During the first quarter of fiscal 2007, as a result of the decision to retain and
operate the Snap Server portion of the systems business, the Company performed an impairment analysis that indicated that the
carrying amount of the long-lived assets exceeded their estimated fair value. This was due in part to the limited cash flows of the
business and a number of uncertainties, which included the significant research and development expenditures necessary to grow the
revenue of the Snap Server portion of the systems business and the significant uncertainties associated with achieving such growth in
revenue. This resulted in an impairment charge of $13.2 million, which was recorded in "Other charges (gains)" in the
Consolidated Statements of Operations in fiscal 2007, of which $5.6 million, $3.1 million and $4.5 million related to the Company's
acquisition-related intangible assets for existing technology, core technology, and trade name, respectively.

The annual amortization expense of the other intangible
assets as of March 31, 2007 is expected to be as follows:

`Estimated Amortization Expense
                                            --------------------------------
                                             Acquisition-     Intellectual
                                               related       property assets
                                            intangible assets and warrants
                                            ---------------  ---------------
                                                       (in thousands)                                         
Fiscal years:
2008                                       $         2,892  $         1,692
2009                                                 2,394               --
2010 and thereafter                                     33               --
                                            ---------------  ---------------
Total                                      $         5,319  $         1,692
                                            ===============  ===============`

Note 6. Assets Held For Sale

In fiscal 2007, 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, three owned buildings, including associated building improvements and property, plant and equipment, have been
classified as assets held for sale and are included in "Assets held for sale" in the Consolidated Balance Sheets at
March 31, 2007 at the Company's carrying value of $12.5 million, which was lower than the fair value less cost to sell. The
fair value less cost to sell was based on considerations from potential buyers, appraisal values, and broker's opinions of value for real
estate. The Company has entered into an exclusive sales listing agreement with a broker to sell these facilities.

In May 2007, subsequent to fiscal year-end, the
Company completed the sale of some of its properties that were previously classified as held for sale. Net proceeds from the sale of the
properties aggregated $19.0 million, which exceeded the Company's carrying value of $12.3 million. As a result, a gain on the
sale of the properties of $6.7 million will be recorded in the first quarter of fiscal 2008 to "Other charges (gains)" in the
Unaudited Condensed Consolidated Statements of Operations.

Note 7. Convertible Notes

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
3/4% Notes                                                        $   225,000  $   225,000
3% Notes                                                                   --       10,637
                                                                   -----------  -----------
Total                                                             $   225,000  $   235,637
                                                                   ===========  ===========`

3/4% Notes:

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 pays 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 are subordinated to all existing and future senior indebtedness of the Company.

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, 2007, $1.7 million was
classified as short-term marketable securities due within one year and $1.6 million was classified as long-term due within three
years.

Convertible Bond Hedge and Warrant

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, 2007, 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 No. 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 fiscal 2007, the Company redeemed the outstanding
$10.6 million balance of its 3% Notes at par value. In fiscal 2006, the Company repurchased $24.6 million in aggregate principal
amount of its 3% Notes on the open market for an aggregate price of $24.3 million, resulting in a loss on extinguishment of debt
of $0.1 million (including unamortized debt issuance costs of $0.3 million). The loss on extinguishment of debt has been
included in "Interest and other income" in the Consolidated Statements of Operations.

Note 8. Share-based Compensation

Stock Benefit Plans



Employee Stock Purchase Plan:



Director Stock Option Plans, including the 2006
Director Stock Option Plan, 2000 Director Stock Option Plan and 1990 Directors' Stock Option Plan:

Assumed Stock Option Plans:

Stock-Based Compensation

On April 1, 2006, the Company adopted SFAS
No. 123(R) using the modified prospective transition method, which requires the Company to measure and recognize compensation
expense for all stock-based awards made to its employees and directors, including employee stock options, employee stock purchase
plans, and other stock-based awards, based on estimated fair values. Accordingly, the Consolidated Statements of Operations for fiscal
2007 reflect the impact of adopting SFAS No. 123(R) and prior periods have not been restated.

Stock-based compensation expense recognized in fiscal
2007 includes (a) stock-based award payments granted prior to, but not yet vested as of April 1, 2006 based on the grant date fair value
estimated in accordance with the original provisions of SFAS No. 123, as adjusted for estimated forfeitures and (b) stock-based award
payments granted subsequent to April 1, 2006, based on the grant-date fair value estimated in accordance with the provisions of SFAS
No. 123(R). The Company recognized the stock-based compensation costs for all stock-based awards using
a straight-line amortization method over the respective requisite service period of the awardsand adjusted it for estimated
forfeitures.

The Company also adopted the alternative transition
method provided in FSP No. 123(R)-3 for calculating the effects of share-based compensation pursuant to SFAS No. 123(R), which
included a simplified method to establish the beginning balance of the additional paid in capital pool related to the tax effects of
employee stock-based compensation, which is available to absorb tax deficiencies recognized subsequent to the adoption of SFAS No.
123(R).

Total compensation expense for the Company's stock-
based awards in fiscal 2007 was $8.5 million. The following table summarizes the impact of the adoption of SFAS No. 123(R) on
stock-based compensation expense included in the Consolidated Statements of Operations for fiscal 2007:

`Year Ended
                                                              March 31, 2007
                                                            ------------------
                                                              (in thousands)    
Stock-based compensation expense by caption:
Cost of revenues                                           $              576
Research and development                                                3,753
Selling, marketing and administrative                                   4,144
                                                            ------------------
    Stock-based compensation expense effect on income
        from continuing operations, net of taxes           $            8,473
                                                            ==================
Stock-based compensation expense by type of award:
Stock options                                              $            6,271
Restricted stock awards and restricted stock units                      1,359
Employee stock purchase plan                                              843
                                                            ------------------
    Stock-based compensation expense effect on income
        from continuing operations, net of taxes           $            8,473
                                                            ==================`



Prior to April 1, 2006, the Company accounted for stock-
based compensation in accordance with APB Opinion No. 25 as interpreted by FIN 44, and complied with the disclosure
provisions of SFAS No. 148, an amendment of SFAS No. 123. Under APB Opinion No. 25, compensation expense
was 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.  Compensation costs related to restricted stock awards and assumed
unvested acquisition-related stock options, determined to be the fair market value of the shares at the date of grant, have been
recognized as compensation expense ratably over the respective vesting period. In addition, the employee stock purchase plan was
deemed noncompensatory under APB Opinion No. 25; therefore, no compensation cost was recorded in relation to the discount offered
to employees for purchases made under the employee stock purchase plan. The following table illustrates the effect on net loss and net
loss per share as if the Company had applied the fair value recognition provisions of SFAS No. 123, as amended, to account for
stock-based compensation for fiscal years 2006 and 2005:

`Years Ended March 31,
                                                            ------------------------------------------
                                                                    2006                  2005
                                                            --------------------  --------------------
                                                            (in thousands, except per share amounts)  
Net loss, as reported                                      $           (148,432) $           (145,106)
Add: Stock-based compensation expense previously
    determined under intrinsic value method, net of taxes                 1,653                 3,191
Deduct: Stockbased compensation expense determined
    under fair valuebased method, net of taxes                          (12,826)              (26,853)
                                                            --------------------  --------------------
Pro forma net loss                                         $           (159,605) $           (168,768)
                                                            ====================  ====================
Basic net loss per share:
As reported                                                $              (1.31) $              (1.31)
Pro forma                                                  $              (1.41) $              (1.52)
Diluted net loss per share:
As reported                                                $              (1.31) $              (1.31)
Pro forma                                                  $              (1.41) $              (1.52)`

Valuation Assumptions



Beginning April 1, 2006, the Company estimated
the volatility of its stock using historical volatility as well as the implied volatility in market-traded options on its common stock in
accordance with guidance in SFAS No. 123(R) and SAB 107. Management determined that a blend of implied volatility and historical
volatility is more reflective of market conditions and a better indicator of expected volatility than using purely historical volatility. The
Company will continue to monitor these and other relevant factors used to measure expected volatility for future option grants. Prior to
the adoption of SFAS No. 123(R), the Company used its historical common stock price volatility in accordance with SFAS No. 123 for
purposes of pro forma information disclosed in the notes to its financial statements for prior periods.

The risk-free interest rate assumption is based upon
observed interest rates using the implied yield currently available on U.S. Treasury zero-coupon issues that is appropriate for the term
of the Company's stock options. The dividend yield assumption is based on the Company's history and expectation of dividend payouts.
The Company has historically not paid dividends and has no foreseeable plans to issue dividends as it is the Company's current policy
to reinvest earnings for its business.

The expected term of stock options represents the
weighted-average period that the stock options are expected to remain outstanding. The Company derived the expected term
assumption based on its historical settlement experience, while giving consideration to options that have life cycles less than the
contractual terms and vesting schedules in accordance with guidance in SFAS No. 123(R) and SAB 107. Prior to the
adoption of SFAS No. 123(R), the Company used its historical settlement experience to derive the expected term for purposes of pro
forma information under SFAS No. 123, as disclosed in the notes to its financial statements for the related periods.



`Years Ended March 31,
                                    ----------------------------------------
                                        2007          2006          2005
                                    ------------  ------------  ------------  
Equity Incentive Plans:
Expected life (in years)                    4.1           2.6           2.3
Risk-free interest rates                    4.8 %         4.1 %         3.1 %
Expected volatility                          44 %          39 %          44 %
Dividend yield                               --            --            --
Weighted average fair value        $       2.63  $       1.07  $       2.14

ESPP:
Expected life (in years)              1.00-1.25           1.2           1.2
Risk-free interest rates            5.07 - 5.11 %         3.8 %         2.6 %
Expected volatility                      44     %          40 %          40 %
Dividend yield                          --                 --            --
Weighted average fair value        $    1.11     $       3.01  $       6.11`

Stock Benefit Plans Activities

Equity Incentive Plans:

`Weighted
                                                                       Average
                                                       Weighted       Remaining
                                                       Average       Contractual      Aggregate
                                                       Exercise         Term          Intrinsic
                                        Shares          Price          (Years)          Value
                                    --------------  --------------  --------------  --------------
                                    (in thousands, except exercise price and contractual terms)   


Outstanding at March 31, 2004              20,656  $        11.25
    Assumed                                 1,232  $         1.50
    Granted                                 4,348  $         7.45
    Exercised                              (1,416) $         2.15
    Forfeited and cancelled                (3,650) $        11.37
                                    --------------
Outstanding at March 31, 2005              21,170  $        10.49
    Granted                                 7,954  $         3.74
    Exercised                              (1,530) $         3.20
    Forfeited and cancelled                (7,652) $         9.09
                                    --------------
Outstanding at March 31, 2006              19,942  $         8.90
    Granted                                 2,637  $         4.41
    Exercised                              (1,244) $         3.52
    Forfeited and cancelled                (8,343) $        11.07
                                    --------------
Outstanding at March 31, 2007              12,992  $         7.11            3.97  $        1,603
                                    ==============  ==============  ==============  ==============

Options vested and expected to
    vest at March 31, 2007                 12,105  $         7.27            3.81  $        1,584
                                    ==============  ==============  ==============  ==============

Options exercisable at
    March 31, 2005                         13,612  $        12.07
                                    ==============  ==============
    March 31, 2006                         13,531  $        10.62
                                    ==============  ==============
    March 31, 2007                          9,501  $         7.84            3.25  $        1,538
                                    ==============  ==============  ==============  ==============`



The aggregate intrinsic value is calculated as the
difference between the exercise price of the underlying awards and the price of the Company's common stock on The NASDAQ Global
Market for the 3.4 million shares subject to options that were in-the-money at March 31, 2007. During fiscal years 2007, 2006 and 2005,
the aggregate intrinsic value of options exercised under the Company's equity incentive plans was $1.2 million, $3.5 million and $7.5
million, respectively, determined as of the date of option exercise.   The following table summarizes information about the Company's
equity incentive plans as of March 31, 2007:

`Options Outstanding                  Options Exercisable
                     ----------------------------------------- ----------------------------
                                      Weighted
                                      Average       Weighted                     Weighted
                         Number      Remaining      Average        Number        Average
Range of              Outstanding   Contractual     Exercise    Outstanding      Exercise
Exercise Prices        at 3/31/07       Life         Price       at 3/31/07       Price
-------------------- -------------- ------------  ------------ --------------  ------------
                       (in thousands, except exercise price and contractual life)          
$0.18 - $0.18                   52         3.87  $       0.18             52  $       0.18
$0.35 - $3.45                2,966         3.54          3.42          2,937          3.42
$3.50 - $4.24                2,062         5.41          4.02            862          3.97
$4.28 - $4.51                1,525         5.47          4.47            497          4.50
$4.52 - $6.30                1,504         5.29          5.79            774          5.99
$6.42 - $9.31                1,856         3.56          8.10          1,375          8.08
$9.36 - $14.60               1,487         2.40         12.33          1,465         12.34
$14.68 - $20.00              1,469         2.11         15.51          1,468         15.51
$20.06 - $59.13                 71         1.91         30.82             71         30.82
                     --------------                            --------------
                            12,992         3.97  $       7.11          9,501  $       7.84
                     ==============                            ==============`









`Weighted
                                                                       Average
                                                                      Grant-Date
                                                                         Fair
                                                        Shares          Value
                                                    --------------  --------------
                                                    (in thousands, except weighted
                                                    average grant-date fair value)  
Nonvested stock at March 31, 2006                              --  $           --
Granted                                                     1,287            4.36
Vested                                                         --              --
Forfeited                                                    (108)           4.30
                                                    --------------
Nonvested stock at March 31, 2007                           1,179  $         4.37
                                                    ==============`



Deferred Stock-based Compensation



Other Compensation

In connection with the Snap Appliance acquisition in July
2004, a management incentive program was established to pay former employees of Snap Appliance cash payments totaling
$13.8 million, which was paid over a two-year period through the second quarter of fiscal 2007. Payments under the
management incentive program were expensed as employees met their employment obligations or were recorded as part of the Snap
Appliance acquisition-related restructuring for involuntarily terminations by the Company.



The Company leases certain office facilities, vehicles,
and equipment under operating lease agreements that expire at various dates through fiscal 2012. As of March 31, 2007, future
minimum lease payments and future sublease income under non-cancelable operating leases and subleases were as follows:

`Future
                                                                     Minimum      Future
                                                                      Lease      Sublease
                                                                    Payments      Income
                                                                   -----------  -----------
                                                                       (in thousands)                   
2008                                                              $     6,888  $     3,517
2009                                                                    3,583          943
2010                                                                    2,795          275
2011                                                                    2,281           17
2012                                                                    1,397           --
2013 and thereafter                                                        --           --
                                                                   -----------  -----------
Total                                                             $    16,944  $     4,752
                                                                   ===========  ===========`

Net rent expense was approximately $2.5 million,
$3.5 million and $2.9 million during fiscal years 2007, 2006 and 2005, 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, 2007, the
carrying value of such investments aggregated $2.0 million. The Company has also committed to provide additional funding of up
to $0.1 million.

The Company was subject to IRS audits for its fiscal
years 1994 through 2003. During the third quarter of fiscal 2007, the Company reached resolution with the United States taxing
authorities on all outstanding audit issues. However, the tax provision continues to reflect judgment and estimation regarding
components of the settlement such as interest calculations and the application of the settlements to state and local taxing jurisdictions.
Although the Company believes its tax estimates are reasonable, the ultimate tax outcome may materially differ from the tax amounts
recorded in its consolidated financial statements and may cause a higher effective tax rate that could materially affect its income tax
provision, results of operations or cash flows in the period or periods for which such determination is made.

The Company is a party to 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. However, because of the nature and inherent
uncertainties of litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of
operations and cash flows could be materially and adversely affected.

In connection with the Company's acquisitions of Snap
Appliance, Eurologic, Elipsan Limited ("Elipsan"), and Platys Communications, Inc. ("Platys"), portions of the
purchase price and other future payments totaling $6.7 million, $3.8 million, $2.0 million and $15.0 million, respectively, were held back
(the "Holdbacks") for unknown liabilities that may have existed as of the acquisition dates.  As of March 31, 2007, the
Company asserted claims against the Eurologic Holdback totaling $1.5 million.  In fiscal 2007, the Company resolved all outstanding claims against the Snap Appliance Holdback.The
remainder of the Platys Holdback of $0.7 million was paid in the second quarter of fiscal 2007. The Elipsan Holdback of $2.0 million and
a portion of the Snap Appliance Holdback were paid in the second quarter of fiscal 2006.

Note10. In-process Technology

As part of the purchase accounting for the Snap
Appliance acquisition, certain amounts of the purchase price were allocated to acquired in-process technology based on established
valuation techniques in the high-technology computer industry and written off for $2.2 million in the second quarter of fiscal 2005
because technological feasibility had not been established and no alternative future uses existed.

Note 11. Restructuring Charges

During fiscal years 2007, 2006 and 2005, the Company
recorded restructuring charges of $3.7 million, $10.4 million and $5.9 million, respectively. All expenses, including
adjustments, associated with the Company's 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 2007 Restructuring Plans

In the first and second quarters of fiscal 2007,
management approved and initiated plans to restructure the Company's operations by simplifying its infrastructure. These restructuring
plans eliminated certain duplicative assets and resources in all functions of the organization worldwide due to consolidating certain
processes in order to reduce its cost structure, which resulted in a charge of $3.9 million in fiscal 2007. In addition, the Company
recorded minimal provision adjustments related to asset impairments, which were partially offset by a reduction for severance and
benefits as actual results were lower than anticipated.

The following table sets forth an analysis of the
components of the fiscal 2007 restructuring plans, which includes the charge, provision adjustments and payments made against the
reserve through March 31, 2007:

`Severance
                                                                      And          Other
                                                                    Benefits      Charges        Total
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Restructuring provision                                          $      3,808  $        101  $      3,909
Provision adjustment                                                      (74)          124            50
Non-cash charges                                                           --          (225)         (225)
Cash paid                                                              (3,545)           --        (3,545)
                                                                  ------------  ------------  ------------
Reserve balance at March 31, 2007                                $        189  $         --  $        189
                                                                  ============  ============  ============`

The Company anticipates that the remaining
restructuring reserve balance of $0.2 million will be substantially paid off by the third quarter of fiscal 2008.

Fiscal 2006 Restructuring Plans

In the third and fourth quarters of fiscal 2006,
management approved and initiated plans to restructure the Company's operations by simplifying the Company's infrastructure. These
restructuring plans eliminated certain duplicative resources in all functions of the organization worldwide, due in part, to the
discontinued operations, the vacating of redundant facilities in order to reduce the Company's cost structure, and the sale of the Company's Singapore manufacturing facility. This resulted in a
restructuring charge of $9.8 million in fiscal 2006 and minimal provision adjustments in fiscal 2007, as actual results for
severance and benefits were lower than anticipated.



The following table sets forth an analysis of the
components of the fiscal 2006 restructuring plans, which includes the charge, provision adjustments and payments made against the
reserve through March 31, 2007:

`Severance
                                                                      And          Other
                                                                    Benefits      Charges        Total
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Restructuring provision                                          $      9,141  $        695  $      9,836
Cash paid                                                              (7,956)         (156)       (8,112)
                                                                  ------------  ------------  ------------
Reserve balance at March 31, 2006                                       1,185           539         1,724
Provision adjustment                                                      (34)           --           (34)
Cash paid                                                              (1,080)         (335)       (1,415)
                                                                  ------------  ------------  ------------
Reserve balance at March 31, 2007                                $         71  $        204  $        275
                                                                  ============  ============  ============`

The Company anticipates that the remaining
restructuring reserve balance of $0.3 million will be substantially paid off by the second quarter of fiscal 2008, primarily
attributable to longer term lease obligations.

Fiscal 2005 Restructuring Plans

In each quarter of fiscal 2005, the Company
implemented restructuring plans to streamline the corporate organization, thereby reducing operating costs by consolidating duplicative
resources in connection with the acquisition of Snap Appliance and the strategic alliance with Vitesse Semiconductor Corporation
("Vitesse") and costs pertaining to estimated future obligations for non-cancelable lease payments for excess facilities in
Germany and United Kingdom. This resulted in a restructuring charge of $5.8 million, of which $5.2 million related to the
involuntary termination of employees in all functions of the organization and $0.6 million related to the estimated loss on the
Company's facilities in fiscal 2005. During fiscal years 2006 and 2005, the Company recorded adjustments to the fiscal 2005
restructuring plan of $(0.4) million and $(0.2) million, respectively, related to the reduction for severance and benefits as
actual results were lower than anticipated and a reduction of lease costs related to the estimated loss on the Company's facilities. As of
March 31, 2006, the Company had utilized all of these charges and the plans are now complete.

Previous Restructuring Plans





`FY 2003         FY 2002         FY 2001
                                     Restructuring   Restructuring   Restructuring
                                          Plan            Plan            Plan         Total
                                     --------------  --------------  --------------  ---------
                                                             (in thousands)                   
Reserve balance at March 31, 2005   $           56  $          271  $          966  $   1,293
Provision adjustment                           154             411             238        803
Cash paid                                      (96)           (290)           (663)    (1,049)
                                     --------------  --------------  --------------  ---------
Reserve balance at March 31, 2006              114             392             541      1,047
Provision adjustment                             8            (107)           (115)      (214)
Cash paid                                      (94)           (199)           (234)      (527)
                                     --------------  --------------  --------------  ---------
Reserve balance at March 31, 2007   $           28  $           86  $          192  $     306
                                     ==============  ==============  ==============  =========`

Acquisition-Related Restructuring

During the first quarter of fiscal 2006, the Company
finalized its Snap Appliance integration plan to eliminate certain duplicative resources, including severance and benefits in connection
with the involuntary termination of approximately 24 employees, exiting duplicative facilities and disposing of duplicative assets. The
acquisition-related restructuring liabilities of $6.7 million were accounted for under EITF No. 95-3 and therefore were included in
the purchase price allocation. Any further changes to the Company's finalized plan will be accounted for under SFAS No. 146
and will be recorded in "Restructuring charges" in the Consolidated Statements of Operations. In the third quarter of fiscal
2006, the Company recorded additional adjustments of $0.2 million due to additional estimated loss related to the facilities that
the Company subleased. As of March 31, 2007, the Company had utilized $4.8 million of these charges. The Company
anticipates that the remaining restructuring reserve balance of $2.1 million will be paid out by the third quarter of fiscal 2012.

The following table sets forth the activity in the accrued
restructuring balance related to the Snap Appliance acquisition-related restructuring plan for fiscal 2007:

`Severance
                                                                      And          Other
                                                                    Benefits      Charges        Total
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Reserve balance at March 31, 2006                                $         46  $      2,489  $      2,535
Cash paid                                                                 (46)         (368)         (414)
                                                                  ------------  ------------  ------------
Reserve balance at March 31, 2007                                $         --  $      2,121  $      2,121
                                                                  ============  ============  ============`

Note 12. Other Charges (Gains)

Other charges (gains) primarily consisted of asset
impairment charges related to certain properties or assets and a minority investment. Other charges (gains) also included charges
associated with the Company's strategic alliances with ServerEngines LLP ("ServerEngines") and Vitesse.

Fiscal 2007 Other Charges (Gains)

The Company recorded asset impairment charges of
$13.2 million related to certain acquisition-related intangible assets (Note 5) and $0.7 million for legal and consulting fees incurred in
connection with its efforts that had been undertaken to sell the Snap Server portion of its systems business, which was recorded in
"Other charges (gains)" in the Consolidated Statements of Operations in fiscal 2007.

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 the impairment is deemed to be other-than-temporary. Circumstances that indicate an other-than-temporary decline
include the length of time and the extent to which the market value has been lower than cost. The Company recorded an impairment
charge of $0.9 million in fiscal 2007 related to a decline in the value of a minority investment deemed to be other-than-
temporary.

Fiscal 2006 Other Charges (Gains)

The Company recorded asset impairment charges of
$10.0 million related to certain acquisition-related intangible assets (Note 5). On December 23, 2005, the Company entered into
a three-year contract manufacturing agreement with Sanmina-SCI whereby Sanmina-SCI, upon the closing of the transaction on
January 9, 2006, assumed manufacturing operations of Adaptec products. In addition, the Company sold certain manufacturing assets,
buildings and improvements and inventory located in Singapore to Sanmina-SCI for $26.6 million (net of closing costs of
$0.6 million). In connection with this agreement, the Company recorded a loss on disposal of assets of $1.6 million that
was recorded in fiscal 2006 in "Other charges (gains)" in the Consolidated Statements of Operations.

Fiscal 2005 Other Charges (Gains)

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 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 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. This resulted in an impairment charge of $5.0 million to reduce the carrying value of these properties classified as
assets held for sale to fair value less cost to sell. In October 2004, the Company completed the sale of these properties with net
proceeds from the sale of the properties aggregating $9.6 million, which exceeded the Company's final revised fair value of
$6.8 million. As a result, a gain of $2.8 million on the sale of buildings was recorded in fiscal 2005 under "Other charges
(gains)" in the Consolidated Statements of Operations.

Note 13. Interest and Other Income

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

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Interest income                                                  $     24,362  $     16,861  $     11,799
Payment of license fee with NSE                                            --            --        (1,692)
Realized loss on repatriation (Note 3)                                     --            --        (4,466)
Gain (loss) on extinguishment of debt, net (Note 7)                        --           (79)           --
Foreign currency transaction gains (losses)                               963          (301)          692
Interest on tax refunds                                                    --            --           691
Other                                                                     293         1,140         1,345
                                                                  ------------  ------------  ------------
Total                                                            $     25,618  $     17,621  $      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.

Note 14. Income Taxes

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

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Income (loss) from continuing operations before taxes:
    Domestic                                                     $    (25,693) $   (100,872) $    (77,444)
    Foreign                                                           (13,165)      (33,352)         (626)
                                                                  ------------  ------------  ------------
                                                                 $    (38,858) $   (134,224) $    (78,070)
                                                                  ============  ============  ============`

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

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Federal:
    Current                                                      $    (51,610) $        644  $        981
    Deferred                                                               --           313        42,393
                                                                  ------------  ------------  ------------
                                                                      (51,610)          957        43,374
                                                                  ------------  ------------  ------------
Foreign:
    Current                                                            (4,206)         (594)        1,902
    Deferred                                                              (79)         (313)         (215)
                                                                  ------------  ------------  ------------
                                                                       (4,285)         (907)        1,687
                                                                  ------------  ------------  ------------
State:
    Current                                                            (7,809)        1,558        (2,047)
    Deferred                                                               --            --         8,561
                                                                  ------------  ------------  ------------
                                                                       (7,809)        1,558         6,514
                                                                  ------------  ------------  ------------
Provision for (benefit from) income taxes                        $    (63,704) $      1,608  $     51,575
                                                                  ============  ============  ============`

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

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
Federal statutory rate                                                  (35.0)%       (35.0)%       (35.0)%
State taxes, net of federal benefit                                      (1.1)%         1.2 %         8.3 %
Foreign subsidiary income at other than the U.S tax rate                 (2.7)%         8.2 %        14.0 %
Change in valuation allowance                                            29.4 %        16.4 %        62.3 %
Changes in tax reserves                                                (148.9)%         0.5 %       (24.2)%
OID Interest                                                            (11.8)%        (3.2)%        (5.0)%
Stock-based compensation                                                 (6.1)%          -- %          -- %
Acquisition related impairment charges                                     -- %        17.0 %        24.3 %
Impact of repatriation of foreign earnings                                 -- %        (0.1)%        22.5 %
Research and development credits                                           -- %        (2.5)%        (3.6)%
Other                                                                    12.3 %        (1.3)%         2.4 %
                                                                  ------------  ------------  ------------
Effective income tax rate                                              (163.9)%         1.2 %        66.0 %
                                                                  ============  ============  ============`

The Company's subsidiary in Singapore operated under
a tax holiday through March 31, 2006. As a result of the Company's divestiture of its manufacturing operations in Singapore, the
Company terminated its tax holiday status and restructured its foreign operations and international tax structure. The Company does
not expect these changes, in and of themselves, to cause its worldwide effective tax rate to differ materially.

On October 22, 2004, the American Jobs Creation
Act of 2004 (the "Act") was signed into law. The Act created 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, the Company repatriated $360.6 million of undistributed
earnings from Singapore to the United States and incurred a tax liability of $17.6 million. The one-time deduction was allowed to
the extent that the repatriated amounts were 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 $255.1 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 foreign subsidiaries 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 upon such repatriation.

The significant components of the Company's deferred
tax assets and liabilities at March 31, 2007 and 2006 were as follows:

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
Deferred tax assets:
    Intangible technology                                         $    45,957  $    42,245
    Research and development tax credits                               34,854       15,768
    Net operating loss carryover                                       15,435       17,742
    Capitalized research and development                                4,779        5,177
    Compensatory and other accruals                                     5,743        8,076
    Restructuring charges                                               1,162        2,117
    Foreign tax credits                                                13,609        1,960
    Deferred revenue                                                    1,874        1,653
    Inventory reserves                                                  3,500        1,195
    Uniform capitalization adjustment                                    1010          373
    Other, net                                                           1611          836
                                                                   -----------  -----------
Gross deferred tax assets                                             129,534       97,142
                                                                   -----------  -----------

Deferred tax liabilities:
    Acquisition-related charges                                        (3,553)      (5,616)
    Fixed assets accrual                                               (1,782)          --
                                                                   -----------  -----------
Gross deferred tax liability                                           (5,335)      (5,616)
                                                                   -----------  -----------
Valuation allowance                                                  (124,070)     (91,476)
                                                                   -----------  -----------
Net deferred tax assets (liabilities)                             $       129  $        50
                                                                   ===========  ===========`

The Company continuously monitors the circumstances
impacting the expected realization of its deferred tax assets on a jurisdiction by jurisdiction basis. At March 31, 2007 and 2006,
the Company's analysis of its deferred tax assets demonstrated that it was more likely than not that substantially all of its U.S. deferred
tax assets would not be realized, resulting in a valuation allowance for deferred tax assets of $124.1 million and $91.5 million,
respectively. Factors that led to this conclusion included, but were not limited to, the Company's past operating results, cumulative tax
losses in the United States, and uncertain future income on a jurisdiction by jurisdiction basis.

As of March 31, 2007 the Company had net
operating loss carryforwards of $45.9 million for federal and $50.5 million for state purposes that expire in various years
beginning in 2019 for federal and 2016 for state purposes. The Company had research and development credits of $26.0 million
for federal purposes that expire in various years beginning in 2019 and $8.9 million credits for state purposes that carry forward
indefinitely until fully exhausted. The Company had foreign tax credits of $13.6 million that expire in various years beginning in 2009. Of
the federal net operating loss carryforwards, $9.4 million were related to stock option deductions, the tax benefit of which will be
credited to additional paid-in capital when realized.





Note 15. 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-based awards
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 income (loss) per share computations for continuing operations, discontinued operations and net income (loss) were
as follows:

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                  (in thousands, except per share amounts)
Numerator:                                                                                                
Income (loss) from continuing operations - basic                 $     24,846  $   (135,832) $   (129,645)
Income (loss) from discontinued operations - basic                      5,997       (12,600)      (15,461)
                                                                  ------------  ------------  ------------
Net income (loss) - basic                                        $     30,843  $   (148,432)     (145,106)
                                                                  ------------  ------------  ------------
Adjustment:                                                                                               
Adjustment for interest expense on 3/4% Notes, net of taxes      $      3,062  $         --  $         --
                                                                  ------------  ------------  ------------

Adjusted income (loss) from continuing operations - diluted      $     27,908  $   (135,832) $   (129,645)
Adjusted income (loss) from discontinued operations - diluted           5,997       (12,600)      (15,461)
                                                                  ------------  ------------  ------------
Adjusted net income (loss) - diluted                             $     33,905  $   (148,432) $   (145,106)
                                                                  ============  ============  ============

Denominator:
Weighted average shares outstanding - basic                           116,602       113,405       110,798
Effect of dilutive securities:
    Employee stock options and other                                      864            --            --
    3/4% Notes                                                         19,224            --            --
                                                                  ------------  ------------  ------------
Weighted average shares and potentially dilutive common shares
outstanding - diluted                                                 136,690       113,405       110,798
                                                                  ============  ============  ============

Income (loss) per share:
    Basic:
        Continuing operations                                    $       0.21  $      (1.20) $      (1.17)
        Discontinued operations                                  $       0.05  $      (0.11) $      (0.14)
        Net income (loss)                                        $       0.26  $      (1.31) $      (1.31)
    Diluted:
        Continuing operations                                    $       0.20  $      (1.20) $      (1.17)
        Discontinued operations                                  $       0.04  $      (0.11) $      (0.14)
        Net income (loss)                                        $       0.25  $      (1.31) $      (1.31)`

Diluted loss per share from continuing operations,
discontinued operations and net loss for fiscal years 2006 and 2005 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 computation from continuing operations, discontinued operations and
net income for fiscal 2007 because their inclusion would have been anti-dilutive. The items excluded for fiscal years 2007, 2006 and
2005 were as follows:

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Outstanding stock options                                              11,745        15,934        15,498
Outstanding restricted stock awards and units                               2            --            --
Warrants (1)                                                           19,871        19,874        19,874
3/4% Notes                                                                 --        19,224        19,224
3% Notes                                                                  646           950         2,298`

________________________

(1) In connection with the issuance of its 3/4% Notes,
the Company entered into a derivative financial instrument to repurchase up to 19,224,000 shares of its common stock, at the
Company's option, at specified prices in the future to mitigate any potential dilution as a result of the conversion of the 3/4% Notes. See
Note 7 for further details.

Note 16. 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 June 2004). The distribution agreement was 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 an amended intellectual property agreement with
IBM, the Company was required to make fixed and variable 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 the Company
entered into the agreement, and the remainder was due quarterly, in varied installments, through December 2008. A portion of
the $52.1 million in total payments was 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 considered payment of the full amount to be probable.

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 at March 31, 2005 and the amortization was 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 was 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 were being recorded as a reduction to revenue in the period the units were sold. On September 30, 2005, the
Company sold the IBM i/p Series RAID Business to IBM. As a result, the distribution agreement was cancelled as part of the sale.

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, as the economic benefits were not considered probable, at March 31, 2005.

In connection with the IBM i/p Series RAID acquisition in
June 2004, 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 had a term of 5 years from the date of issuance and is immediately exercisable. The warrant was
valued at $1.1 million, net of registration costs, 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.

In March 2002, the Company entered into a non-
exclusive, perpetual technology licensing agreement and a product supply agreement with IBM. The product supply agreement had an
exclusive three-year term, which was amended in fiscal 2005 to change the nature of the agreement to be non-exclusive during the
extended two-year term. 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 supplied RAID software, firmware
and hardware to IBM for use in IBM's xSeries servers. The agreement did not contain minimum purchase commitments from IBM.

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 had a term of five years from the date of issuance and was immediately exercisable;
however, the warrant expired unexercised in March 2007. 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 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.

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. A number of the licensed patents have
either expired or are no longer significant to the Company's product portfolio. If the Company should determine that it is necessary to
extend the term of the patent license beyond June 30, 2007, the Company believes that it will be able to reach agreement with
IBM for such an extension, without interruption to its business operations.

Note 17. Guarantees

Intellectual Property and Other 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. In addition, the Company has agreements whereby it indemnifies its directors and certain of its officers for certain events
or occurrences while the officer or director is, or was, serving at the Company's request in such capacity. These indemnification
agreements are not subject to a maximum loss clause; however, the Company maintains a Director and Officer insurance policy which
may cover all or a portion of the liabilities arising from its obligation to indemnify its directors and officers. 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. Therefore, no amount has
been accrued in the accompanying consolidated 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 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 2007 and 2006.

A reconciliation of the changes to the Company's
warranty accrual for fiscal years 2007 and 2006 was as follows:

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
Balance at beginning of period                                    $     2,051  $     2,084
Warranties provided                                                     3,770        5,028
Actual costs incurred                                                  (4,871)      (5,061)
                                                                   -----------  -----------
Balance at end of period                                          $       950  $     2,051
                                                                   ===========  ===========`

Note 18. Segment, Geographic and Significant Customer
Information

Segment Information

During the first quarter of fiscal 2007, as a result of
retaining the Snap Server portion of the systems business, the Company reorganized its internal organization structure and identified
SSG as a new segment, in addition to its existing segments.  Following the reorganization, the Company operated in three segments:
DPS, SSG and DSG.  A description of the types of customers or products and services provided by each segment is as follows:













The unallocated corporate income and expenses, which
are in the "Other" category, include amortization of acquisition-related intangible assets, write-off of acquired in-process
technology, restructuring charges, goodwill impairment, other charges (gains), interest and other income, interest expense, all
administrative expenses and certain research and development, selling and marketing expenses.

Summarized financial information on the Company's
segments, under the new organizational structure, is shown in the following table. The segment financial data for fiscal years 2007,
2006 and 2005 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 segments nor are the segments evaluated under these
criteria. Segment financial information is summarized as follows for fiscal years 2007, 2006 and 2005:

`DPS        SSG        DSG       Other      Total
                            ---------  ---------  ---------  ---------  ---------
                                                 (in thousands)                  
Fiscal 2007:
Net revenues               $ 209,944  $  28,060  $  17,204  $      --  $ 255,208
Segment income (loss)         34,366     (7,022)     1,606    (67,808)   (38,858)
Fiscal 2006:
Net revenues               $ 276,203  $  33,997  $  33,942  $      --  $ 344,142
Segment income (loss)         60,015     (4,949)    (2,032)  (187,258)  (134,224)
Fiscal 2005:
Net revenues               $ 332,925  $  31,259  $  38,332  $      --  $ 402,516
Segment income (loss)         72,450     (1,387)     4,788   (153,921)   (78,070)`

The following table presents the details of unallocated
corporate income and expenses for fiscal years 2007, 2006 and 2005:

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Unallocated corporate expenses, net                              $    (71,610) $    (88,930) $    (97,773)
Write-off of acquired in-process technology                                --            --        (2,200)
Restructuring charges                                                  (3,711)      (10,430)       (5,896)
Goodwill impairment                                                        --       (90,602)      (52,272)
Other charges (gains)                                                 (14,700)      (11,603)          290
Interest and other income                                              25,618        17,621         8,369
Interest expense                                                       (3,405)       (3,314)       (4,439)
                                                                  ------------  ------------  ------------
Total                                                            $    (67,808) $   (187,258) $   (153,921)
                                                                  ============  ============  ============`

With OEMs incorporating other connectivity technologies
directly into their products, the increased level of competition entering the market, and the complexities of the retail channel, the
Company decided in fiscal 2007 not to invest further in its DSG segment. As a result, the Company wound down the business
throughout fiscal 2007 and exited it at March 31, 2007. The remaining SCSI products from its DSG segment will be included with its
DPS segment beginning in the first quarter of fiscal 2008.

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

`Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
United States                                                    $    115,064  $    139,335  $    161,666
Singapore                                                              91,602       204,969       240,830
Ireland                                                                48,603            --            --
Other countries                                                           (61)         (162)           20
                                                                  ------------  ------------  ------------
Total                                                            $    255,208  $    344,142  $    402,516
                                                                  ============  ============  ============`

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

`March 31,
                                                                   ------------------------
                                                                      2007         2006
                                                                   -----------  -----------
                                                                       (in thousands)                   
United States                                                     $    14,803  $    28,305
Singapore                                                                 254          723
Other countries                                                           795        1,637
                                                                   -----------  -----------
Total                                                             $    15,852  $    30,665
                                                                   ===========  ===========`



Note 19. Supplemental Disclosure of Cash Flows

`Years Ended March 31,
                                                                               -------------------------------
                                                                                 2007       2006       2005
                                                                               ---------  ---------  ---------
                                                                                          (in thousands)      
Interest paid                                                                 $   4,150  $   3,301  $   4,308
Income taxes paid                                                                 1,369     15,856      2,679
Income tax refund received                                                        2,563         64        964
Non-cash investing and financial activities:
Deferred stock-based compensation                                                    --         --      3,598
Adjustment for deferred stock-based compensation                                   (319)      (444)      (563)
Common stock issued for acquisitions                                                 --         --      3,464
Unrealized gain (loss) on available-for-sale securities                           3,792     (2,687)    (2,732)`

Note 20. Comparative Quarterly Financial Data (unaudited)



`Quarters
                                     ------------------------------------------
                                       First     Second      Third     Fourth      Year
                                     ---------  ---------  ---------  ---------  ---------
                                              (in thousands, except per share amounts)
Fiscal 2007:                                                                              
Net revenues                        $  69,071  $  73,553  $  60,650  $  51,934  $ 255,208
Gross profit                           22,270     26,543     14,843     17,578     81,234
Income (Loss) from continuing operati (24,824)    48,757      5,077     (4,164)    24,846
Income (loss) from discontinued
operations, net of taxes                1,554      2,308      1,301        834      5,997
Net income (loss)                     (23,270)    51,065      6,378     (3,330)    30,843
Net loss per share:
    Basic
        Continuing operations       $   (0.21) $    0.42  $    0.04  $   (0.04) $    0.21
        Discontinued operations     $    0.01  $    0.02  $    0.01  $    0.01  $    0.05
        Net income (loss)           $   (0.20) $    0.44  $    0.05  $   (0.03) $    0.26
    Diluted
        Continuing operations       $   (0.21) $    0.36  $    0.04  $   (0.04) $    0.20
        Discontinued operations     $    0.01  $    0.02  $    0.01  $    0.01  $    0.04
        Net income (loss)           $   (0.20) $    0.38  $    0.05  $   (0.03) $    0.25
Shares used in computing net
income (loss) per share:
    Basic                             115,609    116,325    116,959    117,516    116,602
    Diluted                           115,609    136,735    137,330    117,516    136,690
                                                                                          
Fiscal 2006:                                                                              
Net revenues                        $  83,813  $  92,588  $  86,647  $  81,094  $ 344,142
Gross profit                           24,088     30,129     30,170     29,506    113,893
Loss from continuing operations       (14,060)   (99,862)    (6,098)   (15,812)  (135,832)
Income (loss) from discontinued
operations, net of taxes              (21,913)    (5,944)     2,837     12,420    (12,600)
Net loss                              (35,973)  (105,806)    (3,261)    (3,392)  (148,432)
Net loss per share:
    Basic
        Continuing operations       $   (0.13) $   (0.88) $   (0.05) $   (0.14) $   (1.20)
        Discontinued operations     $   (0.19) $   (0.05) $    0.02  $    0.11  $   (0.11)
        Net income (loss)           $   (0.32) $   (0.94) $   (0.03) $   (0.03) $   (1.31)
    Diluted
        Continuing operations       $   (0.13) $   (0.88) $   (0.05) $   (0.14) $   (1.20)
        Discontinued operations     $   (0.19) $   (0.05) $    0.02  $    0.11  $   (0.11)
        Net income (loss)           $   (0.32) $   (0.94) $   (0.03) $   (0.03) $   (1.31)
Shares used in computing net
income (loss) per share:
    Basic                             112,445    112,965    113,531    114,678    113,405
    Diluted                           112,445    112,965    113,531    114,678    113,405`

In the first quarter of fiscal 2007, there was a
reclassification from previously reported amounts as the Company decided to retain the Snap Server portion of the systems business,
which had previously been classified as discontinued operations. Accordingly, the Company has reclassified the financial statements
and related disclosures for all periods presented to reflect this business as continuing operations.

In the first quarter of fiscal 2007, the Company recorded
an impairment charge of $13.2 million related to the Snap server portion of its systems business, recorded stock-based compensation
in accordance with SFAS No. 123(R) of $2.6 million and implemented a restructuring plan. In second quarter of fiscal 2007, the
Company recorded stock-based compensation in accordance with SFAS No. 123(R) of $2.0 million, received a discrete tax benefit of
$46.0 million primarily attributable to the settlement of certain tax disputes with the United States and Singapore taxing authorities,
including the resolution of the Company's fiscal 1997 U.S. Tax Court Litigation and implemented a restructuring plan.  In the third
quarter of fiscal 2007, the Company recorded inventory-related charges of $7.8 million, recorded stock-based compensation in
accordance with SFAS No. 123(R) of $2.2 million and received a discrete tax benefit of $12.9 million primarily attributable to the
settlement of certain tax disputes with the U.S. taxing authorities, including the resolution of its fiscal 2002 and fiscal 2003 IRS audit
cycle. In the fourth quarter of fiscal 2007, the Company recorded stock-based
compensation in accordance with SFAS No. 123(R) of $1.7 million and recorded a write-down of a minority investment of $0.9
million (Note 12). In the second quarter of fiscal 2006, the Company recorded an impairment charge of $90.6 million to
write-off goodwill (Note 5). In the third quarter of fiscal 2006, the Company recorded a loss on disposal of assets of
$1.5 million (Note 12) and implemented a restructuring plan. In the fourth quarter of fiscal 2006, the Company recorded an
impairment charge of $10.0 million to write-down the systems business' long-lived assets to fair value (Note 5) and
implemented a restructuring plan. These actions affect the comparability of this data.

Note 21. Glossary (Unaudited)

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.



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.



---



ADAPTEC, INC.SCHEDULE IIVALUATION AND
QUALIFYING ACCOUNTS
FOR THE YEARS ENDED MARCH 31, 2007, 2006 AND 2005

`Balance at                          Balance at
                                          Beginning                            End of
                                          of Period   Additions   Deletions     Period
                                          ----------  ----------  ----------  ----------
                                                          (in thousands)                            
Year ended March 31, 2007
    Allowance for doubtful accounts(1)   $      814  $       67  $      362  $      519
    Sales returns(1)                          4,743       9,393      11,737       2,399
    Allowances(1)                             6,067      10,241      13,005       3,303
    Allowance for Deferred Tax Assets        91,476      32,594          --     124,070

Year ended March 31, 2006
    Allowance for doubtful accounts(1)   $    1,029  $        5  $      220  $      814
    Sales returns(1)                          4,199      12,445      11,901       4,743
    Allowances(1)                            10,090      14,350      18,373       6,067
    Allowance for Deferred Tax Assets        67,167      24,309          --      91,476

Year ended March 31, 2005
    Allowance for doubtful accounts(1)   $    1,269  $      132  $      372  $    1,029
    Sales returns(1)                          3,960      15,535      15,296       4,199
    Allowances(1)                             4,727      23,362      17,999      10,090
    Allowance for Deferred Tax Assets            --      67,167          --      67,167`

________________________

Notes:

(1)

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.





---







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.                                              
|------------------- | -----------------------------------------------------------
|                    |                                                            
|                    | /s/ SUBRAMANIAN SUNDARESH                                  
|                    | Subramanian Sundaresh
President and Chief Executive Officer
|Date:  June 6, 2007 |                                                            



|Signature                        | Title                                      | Date        
|-------------------------------- | ------------------------------------------ | ------------
|                                 |                                            |             
|/s/ SUBRAMANIAN SUNDARESH        | President and Chief Executive Officer      | June 6, 2007
|Subramanian Sundaresh            | (principal executive officer)              |             
|                                 |                                            |             
|/s/ CHRISTOPHER O'MEARA          | Vice President and Chief Financial Officer | June 6, 2007
|Christopher O'Meara              | (principal financial officer)              |             
|                                 |                                            |             
|/s/ JOHN M. WESTFIELD            | Vice President and Corporate Controller    | June 6, 2007
|John M. Westfield                | (principal accounting officer)             |             
|                                 |                                            |             
|/s/ D. SCOTT MERCER              | Chairman                                   | June 6, 2007
|D. Scott Mercer                  |                                            |             
|                                 |                                            |             
|/s/ JON S. CASTOR                | Director                                   | June 6, 2007
|Jon S. Castor                    |                                            |             
|                                 |                                            |             
|/s/ JOSEPH S. KENNEDY            | Director                                   | June 6, 2007
|Joseph S. Kennedy                |                                            |             
|                                 |                                            |             
|/s/ ROBERT J. LOARIE             | Director                                   | June 6, 2007
|Robert J. Loarie                 |                                            |             
|                                 |                                            |             
|/s/ JUDITH M. O'BRIEN            | Director                                   | June 6, 2007
|Judith M. O'Brien                |                                            |             
|                                 |                                            |             
|/s/ CHARLES J. ROBEL             | Director                                   | June 6, 2007
|Charles J. Robel                 |                                            |             
|                                 |                                            |             
|/s/ DR. DOUGLAS E. VAN HOUWELING | Director                                   | June 6, 2007
|Dr. Douglas E. Van Houweling     |                                            |             
|                                 |                                            |             

---

INDEX TO EXHIBITS

|               |    |                                                                                                                                                                                                                                                |  | Incorporated by Reference |            
|-------------- | -- | ---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------- |  | ------------------------- | -----------
|               |    |                                                                                                                                                                                                                                                |  |                           |            
|Exhibit Number |    | Exhibit Description                                                                                                                                                                                                                            |  | Form                      | File Number
|               |    |                                                                                                                                                                                                                                                |  |                           |            
|2.01           |    | Asset Purchase Agreement, dated September 30, 2005, by and
between the Registrant and International Business Machines Corporation                                                                                                              |  | 8-K                       | 000-15071  
|3.01           |    | Certificate of Incorporation of Registrant filed with Delaware
Secretary of State on November 19, 1997.                                                                                                                                        |  | 10-K                      | 000-15071  
|3.02           |    | Amended and Restated Bylaws of the Company                                                                                                                                                                                                     |  | 8-K                       | 000-15701  
|4.01           |    | Indenture, dated as of December 22, 2003, by and between the
Registrant and Wells Fargo Bank, National Association.                                                                                                                            |  | 10-Q                      | 000-15071  
|4.02           |    | Form of 3/4% Convertible Senior Subordinated
Note.                                                                                                                                                                                             |  | 10-Q                      | 000-15071  
|4.03           |    | 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  
|4.04           |    | 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  
|4.05           |    | Warrant Agreement, dated as of June 29, 2004, between the
Registrant and International Business Machines Corporation                                                                                                                           |  | S-3                       | 333-119266 
|4.06           |    | Warrant Agreement, dated as of August 10, 2004, between the
Registrant and International Business Machines Corporation                                                                                                                         |  | S-3                       | 333-119266 
|10.01          | +  | Registrant's Savings and Retirement Plan.                                                                                                                                                                                                      |  | 10-K                      | 000-15071  
|10.02          | +  | Second Amendment to the Registrant's Savings and Retirement
Plan.                                                                                                                                                                              |  | 10-K                      | 000-15071  
|10.03          | +  | Third Amendment to the Registrant's Savings and Retirement
Plan.                                                                                                                                                                               |  | 10-K                      | 000-15071  
|10.04          | +  | Registrant's 1986 Employee Stock Purchase Plan (amended and
restated June 1998, August 2000 and August 2003).                                                                                                                                  |  | 10-Q                      | 000-15071  
|10.05          | +  | 1990 Stock Plan, as amended.                                                                                                                                                                                                                   |  | SC TO-I                   | 005-38119  
|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-K                      | 000-15071  
|10.07          | +  | 1999 Stock Plan.                                                                                                                                                                                                                               |  | SC TO-I                   | 005-38119  
|10.08          | +  | 2000 Nonstatutory Stock Option Plan and Form of Stock Option
Agreement.                                                                                                                                                                        |  | SC TO-I                   | 005-38119  
|10.09          | +  | 1990 Directors' Option Plan and forms of Stock Option
Agreement, as amended.                                                                                                                                                                   |  | 10-K                      | 000-15071  
|10.10          | +  | 2000 Director Option Plan and Form of
Agreement.                                                                                                                                                                                               |  | 10-Q                      | 000-15071  
|10.11          |    | License Agreement between International Business Machines
Corporation and the Registrant.                                                                                                                                                      |  | 10-K                      | 000-15071  
|10.12          |    | Amendment to License Agreement between International
Business Machines Corporation and the Registrant.                                                                                                                                         |  | 10-K                      | 000-15071  
|10.13          |    | Asset Purchase Agreement between International Business
Machines Corporation and the Registrant.                                                                                                                                               |  | 10-K                      | 000-15071  
|10.14          | *  | 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  
|10.15          |    | Base Agreement, dated as of March 24, 2002, by and between
the Registrant and International Business Machines Corporation                                                                                                                      |  | 10-Q                      | 000-15071  
|10.16          | +  | 2004 Equity Incentive Plan, as amended on August 24,
2006                                                                                                                                                                                      |  | 8-K                       | 000-15071  
|10.17          | +  | Form of Stock Option Agreement under the 2004 Equity Incentive
Plan                                                                                                                                                                            |  | 10-Q                      | 000-15071  
|10.18          | +  | Form of Restricted Stock Purchase Agreement under the 2004
Equity Incentive Plan                                                                                                                                                               |  | 10-Q                      | 000-15071  
|10.19          | +  | Form of Restricted Stock Unit Agreement under the 2004 Equity
Incentive Plan                                                                                                                                                                   |  | 10-Q                      | 000-15071  
|10.20          | +  | Eurologic Systems Group Limited 1998 Share Option Plan Rules
(Amended as of 1 April 2003)                                                                                                                                                      |  | S-8                       | 333-104685 
|10.21          | +  | Broadband Storage, Inc. 2001 Stock Option and Restricted Stock
Purchase Plan                                                                                                                                                                   |  | S-8                       | 333-118090 
|10.22          | +  | Snap Appliance, Inc. 2002 Stock Option and Restricted Stock
Purchase Plan                                                                                                                                                                      |  | S-8                       | 333-118090 
|10.23          | +  | Stargate Solutions, Inc. 1999 Incentive Stock Plan                                                                                                                                                                                             |  | S-8                       | 333-69116  
|10.24          | +  | Employment Agreement of Subramanian "Sundi"
Sundaresh, effective as of September 21, 2005                                                                                                                                                      |  | 8-K                       | 000-15071  
|10.25          | +  | Employment Agreement Addendum of Mr. Subramanian
Sundaresh, effective as of November 14, 2005                                                                                                                                                  |  | 8-K/A                     | 000-15071  
|10.26          | +  | Employment Agreement of Marcus Lowe, effective as of
September 21, 2005                                                                                                                                                                        |  | 8-K                       | 000-15071  
|10.27          | +  | 2005 Deferred Compensation Plan                                                                                                                                                                                                                |  | 10-Q                      | 000-15071  
|10.28          | ** | Manufacturing Services and Supply Agreement by and between
the Registrant and Sanmina-SCI Corporation                                                                                                                                          |  | 10-Q                      | 000-15071  
|10.29          | ** | Asset Purchase and Sale Agreement, dated as of December 23,
2005, by and among Adaptec Manufacturing (s) Pte. Ltd., Sanmina-SCI Corporation and Sanmina-SCI Systems Singapore Pte.
Ltd.                                                        |  | 10-Q                      | 000-15071  
|10.30          | ** | Amendment to Manufacturing Services and Supply Agreement by
and between the Registrant and Sanmina-SCI Corporation                                                                                                                             |  | 10-Q                      | 000-15071  
|10.31          | +  | Employment Agreement of  Mr. Christopher O'Meara, effective as
of March 21, 2006                                                                                                                                                               |  | 8-K                       | 000-15071  
|10.32          | +  | Adaptec Incentive Plan, Fiscal 2007                                                                                                                                                                                                            |  | 8-K                       | 000-15071  
|10.33          | ** | Asset Purchase and Sale Agreement, dated as of January 31,
2006, by and among Adaptec, Inc., Sanmina-SCI Corporation and Sanmina-SCI USA, Inc.                                                                                                 |  | 10-K                      | 000-15071  
|10.34          | +  | Non-Employee Director Compensation Policy, as
amended                                                                                                                                                                                          |  | 10-Q                      | 000-15071  
|10.35          | +  | Adaptec, Inc. 2006 Director Plan                                                                                                                                                                                                               |  | DEF 14A                   | 000-15071  
|10.36          | +  | Notice of Restricted Stock Grant and Restricted Stock Agreement
under 2006 Director Plan                                                                                                                                                       |  | 8-K                       | 000-15071  
|10.37          | +  | Notice of Stock Option Grant and Stock Option Award Agreement
under 2006 Director Plan                                                                                                                                                         |  | 8-K                       | 000-15701  
|10.38          | +  | Notice of Stock Appreciation Right Award and Stock Appreciation
Right Award Agreement under 2006 Director Plan                                                                                                                                 |  | 8-K                       | 000-15071  
|10.39          | +  | Notice of Restricted Stock Unit Award and Restricted Stock Unit
Award Agreement under 2006 Director Plan                                                                                                                                       |  | 8-K                       | 000-15071  
|10.40          | +  | Offer Letter between the Company and Judith M. O'Brien, dated
July 14, 2006                                                                                                                                                                    |  | 8-K                       | 000-15071  
|10.41          | +  | Offer Letter between the Company and Jon S. Castor, dated July
17, 2006                                                                                                                                                                        |  | 8-K                       | 000-15071  
|10.42          | +  | Fiscal 2008 Adaptec Incentive Plan                                                                                                                                                                                                             |  | 8-K                       | 000-15071  
|10.43          | +  | Executive Employment Agreement of Ted Chen, effective as of
May 1, 2007                                                                                                                                                                        |  | 8-K                       | 000-15071  
|10.44          | +  | Executive Employment Agreement of Manoj Goyal, effective as of
May 1, 2007                                                                                                                                                                     |  | 8-K                       | 000-15071  
|10.45          | +  | Executive Employment Agreement of Russ Johnson, effective as
of May 1, 2007                                                                                                                                                                    |  | 8-K                       | 000-15071  
|10.46          | +  | Executive Employment Agreement of Steve Terlizzi, effective as
of May 1, 2007                                                                                                                                                                  |  | 8-K                       | 000-15071  
|10.47          | +  | Form of Indemnification Agreement entered into between the
Company and its officers and directors                                                                                                                                              |  |                           |            
|21.01          |    | Subsidiaries of Registrant                                                                                                                                                                                                                     |  |                           |            
|23.01          |    | Consent of Independent Registered Public Accounting Firm,
PricewaterhouseCoopers LLP.                                                                                                                                                          |  |                           |            
|31.1           |    | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                       |  |                           |            
|31.2           |    | Certification pursuant to Section 302 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                       |  |                           |            
|32.1           |    | Certification pursuant to Section 906 of the Sarbanes-Oxley
Act of 2002.                                                                                                                                                                       |  |                           |            



(A) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended March 31, 1987.

(B) Incorporated by reference to exhibits filed with
Registrant's Annual Report on Form 10-K for the year ended March 31, 1993.

+

*

** Confidential treatment has been requested for portions of this agreement.