**UNITED STATESSECURITIES AND EXCHANGE COMMISSIONWASHINGTON, D.C. 20549**

----

**FORM 10-Q**

| (Mark One)                                                                                                                                                                                                                                                                            | ** **                                                                                                   |
|---------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------------|--------------------------------------------------------------------------------------------------------------|
| **x**                                                                                                                                                                                                                                                                                 | **Quarterly report pursuant to Section 13  or 15(d) of the Securities Exchange Act of 1934**  |
| ** **                                                                                                                                                                                                                                                                            | ** **                                                                                                   |
| **For the  quarterly period ended September 30, 2006 or**                                                                                                                                                                                                                        |
|                                                                                                                                                                                                                                                                                  | ** **                                                                                                   |
| ** ̈**                                                                                                                                                                                                                                                                            | **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  0-15071**                                                                                                                                                                                                                                              |

 

----

**ADAPTEC, INC.**(Exact name of registrantas specified in its charter)

| **DELAWARE**                                                                        |   | **94-2748530**                        |
|-------------------------------------------------------------------------------------|--------|---------------------------------------|
| (State or other  jurisdiction of incorporation or organization)                     |   | (I.R.S. Employer  Identification No.) |
|                                                                                |   |                                  |
| ** **                                                                          |   | ** **                            |
| **691 S.  MILPITAS BLVD., MILPITAS, CALIFORNIA**                                    |   | **95035**                             |
| (Address of  principal executive offices)                                           |   | (Zip Code)                            |
|                                                                                |
| Registrant’s  telephone number, including area code ** (408)  945-8600**  |
| ** **                                                                          |
| **N/A**                                                                             |
| (Former name,  former address and former fiscal year, if changed since last report) |

 

----

Indicate by check mark whetherthe registrant: (1) has filed all reports required to be filed bySection 13 or 15(d) of the Securities Exchange Act of 1934 during thepreceding 12 months (or for such shorter period that the registrant wasrequired to file such reports), and (2) has been subject to such filingrequirements for the past 90 days.

Yes x              No o

Indicate by check mark whether the registrant is alarge accelerated filer, an accelerated filer, or a non-accelerated filer (asdefined in Rule 12b-2 of the Exchange Act).

Large Accelerated Filer o              Accelerated Filer x              Non-Accelerated Filer o

Indicate by check mark whether the registrant is ashell company (as defined in Rule 12b-2 of the Exchange Act). Yes o  No x

The number of shares of Adaptec’scommon stock outstanding as of November 2, 2006 was 117,454,763.

 

----

**TABLE OF CONTENTS**

 
|           | ** ** | ** **             | ** ** | ** **                                                                                  | ** ** | **Page** |
|-----------|------------|------------------------|------------|---------------------------------------------------------------------------------------------|------------|----------|
| Part  I.  |       | Financial  Information |       |                                                                                        |
|      |       | Item  1.               |       | Financial  Statements:                                                                      |       |     |
|      |       |                   |       | Unaudited Condensed Consolidated Statements of  Operations                                  |       | 3        |
|      |       |                   |       | Unaudited Condensed Consolidated Balance Sheets                                             |       | 4        |
|      |       |                   |       | Unaudited Condensed Consolidated Statements of Cash  Flows                                  |       | 5        |
|      |       |                   |       | Notes to Unaudited Condensed Consolidated Financial  Statements                             |       | 6        |
|      |       | Item 2.                |       | Management’s Discussion and Analysis of Financial  Condition and Results of Operations |       | 22       |
|      |       | Item 3.                |       | Quantitative and Qualitative Disclosures About Market  Risk                                 |       | 31       |
|      |       | Item 4.                |       | Controls and Procedures                                                                     |       | 32       |
| Part  II. |       | Other  Information     |       |                                                                                        |
|      |       | Item 1.                |       | Legal Proceedings                                                                           |       | 33       |
|      |       | Item 1A.               |       | Risk Factors                                                                                |       | 33       |
|      |       | Item 4.                |       | Submission of Matters to a Vote of Security Holders                                         |       | 43       |
|      |       | Item 6.                |       | Exhibits                                                                                    |       | 43       |
|      |       | Signatures             |       | 44                                                                                          |

 

2

----

**PART I.   FINANCIALINFORMATION**

**Item 1.   FinancialStatements**

**ADAPTEC, INC.CONDENSED CONSOLIDATED STATEMENTS OF OPERATIONS(unaudited)**
| ** **                                                            | ** ** | **Three-Month Period Ended**                                | ** ** | **Six-Month Period Ended** | ** ** |
|-----------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                            | ** ** | **September 30,  2006**                                          | ** ** | **September 30,  2005**         | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                                                            | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                                                                  |       |                                                                  |       |                                 |       |   |   |   |   |
| Net revenues                                                          |       | $                                                                     | 73,553     |                                 | $          | 92,588 |   | $ | 142,624 |   | $ | 176,401 |   |
| Cost of revenues                                                      |       | 47,010                                                                |       | 62,459                               |       | 93,811 |   | 122,184 |   |
| Gross profit                                                          |       | 26,543                                                                |       | 30,129                               |       | 48,813 |   | 54,217 |   |
| Operating expenses:                                                   |       |                                                                  |       |                                 |       |   |   |   |   |
| Research and  development                                             |       | 13,560                                                                |       | 17,856                               |       | 30,854 |   | 36,236 |   |
| Selling,  marketing and administrative                                |       | 15,693                                                                |       | 19,239                               |       | 31,087 |   | 37,700 |   |
| Amortization of  acquisition-related intangible assets                |       | 1,470                                                                 |       | 2,800                                |       | 3,056 |   | 5,856 |   |
| Restructuring  charges                                                |       | 1,085                                                                 |       | 478                                  |       | 4,096 |   | 518 |   |
| Goodwill  impairment                                                  |       | —                                                                |       | 90,602                               |       | — |   | 90,602 |   |
| Other charges                                                         |       | —                                                                |       | —                               |       | 13,942 |   | — |   |
| Total operating  expenses                                             |       | 31,808                                                                |       | 130,975                              |       | 83,035 |   | 170,912 |   |
| Loss from continuing  operations                                      |       | (5,265                                                                | )          | (100,846                             | )          | (34,222 | ) | (116,695 | ) |
| Interest and other  income                                            |       | 5,825                                                                 |       | 4,523                                |       | 11,728 |   | 8,131 |   |
| Interest expense                                                      |       | (883                                                                  | )          | (867                                 | )          | (1,759 | ) | (1,840 | ) |
| Loss from continuing  operations before income taxes                  |       | (323                                                                  | )          | (97,190                              | )          | (24,253 | ) | (110,404 | ) |
| Provision for (benefit  from) income taxes                            |       | (49,080                                                               | )          | 2,672                                |       | (48,186 | ) | 3,518 |   |
| Income (loss) from  continuing operations                             |       | 48,757                                                                |       | (99,862                              | )          | 23,933 |   | (113,922 | ) |
| Discontinued  operations, net of taxes                                |       |                                                                  |       |                                 |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of taxes             |       | (132                                                                  | )          | 1,032                                |       | 132 |   | (20,881 | ) |
| Income (loss)  from disposal of discontinued operations, net of taxes |       | 2,440                                                                 |       | (6,976                               | )          | 3,730 |   | (6,976 | ) |
| Income (loss) from  discontinued operations                           |       | 2,308                                                                 |       | (5,944                               | )          | 3,862 |   | (27,857 | ) |
| Net income (loss)                                                     |       | $                                                                     | 51,065     |                                 | $          | (105,806 | ) | $ | 27,795 |   | $ | (141,779 | ) |
|                                                                  |       |                                                                  |       |                                 |       |   |   |   |   |
| Income (loss) per  share:                                             |       |                                                                  |       |                                 |       |   |   |   |   |
| Basic                                                                 |       |                                                                  |       |                                 |       |   |   |   |   |
| Continuing  operations                                                |       | $                                                                     | 0.42       |                                 | $          | (0.88 | ) | $ | 0.21 |   | $ | (1.01 | ) |
| Discontinued  operations                                              |       | $                                                                     | 0.02       |                                 | $          | (0.05 | ) | $ | 0.03 |   | $ | (0.25 | ) |
| Net income  (loss)                                                    |       | $                                                                     | 0.44       |                                 | $          | (0.94 | ) | $ | 0.24 |   | $ | (1.26 | ) |
| Diluted                                                               |       |                                                                  |       |                                 |       |   |   |   |   |
| Continuing  operations                                                |       | $                                                                     | 0.36       |                                 | $          | (0.88 | ) | $ | 0.19 |   | $ | (1.01 | ) |
| Discontinued  operations                                              |       | $                                                                     | 0.02       |                                 | $          | (0.05 | ) | $ | 0.03 |   | $ | (0.25 | ) |
| Net income  (loss)                                                    |       | $                                                                     | 0.38       |                                 | $          | (0.94 | ) | $ | 0.22 |   | $ | (1.26 | ) |
|                                                                  |       |                                                                  |       |                                 |       |   |   |   |   |
| Shares used in  computing income (loss) per share:                    |       |                                                                  |       |                                 |       |   |   |   |   |
| Basic                                                                 |       | 116,325                                                               |       | 112,965                              |       | 115,967 |   | 112,705 |   |
| Diluted                                                               |       | 136,735                                                               |       | 112,965                              |       | 135,991 |   | 112,705 |   |

 

See accompanying Notes toUnaudited Condensed Consolidated Financial Statements.

3

----

**ADAPTEC, INC.CONDENSED CONSOLIDATED BALANCE SHEETS(unaudited)**
| ** **                                                   | ** ** | **September 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|--------------------------------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                                                   | ** ** | **(in thousands)**          | ** ** |
| **Assets**                                                   |       |                             |       |                         |       |
| Current assets:                                              |       |                             |       |                         |       |
| Cash and cash  equivalents                                   |       | $                                | 86,588     |                         | $          | 131,373 |   |
| Marketable  securities                                       |       | 468,884                          |       | 425,179                      |       |
| Restricted cash  and marketable securities                   |       | 1,680                            |       | 1,663                        |       |
| Accounts  receivable, net                                    |       | 41,393                           |       | 47,876                       |       |
| Inventories                                                  |       | 36,459                           |       | 28,259                       |       |
| Prepaid expenses  and other current assets                   |       | 25,885                           |       | 26,294                       |       |
| Total current  assets                                        |       | 660,889                          |       | 660,644                      |       |
| Property and equipment,  net                                 |       | 28,887                           |       | 30,665                       |       |
| Restricted marketable  securities, less current portion      |       | 2,328                            |       | 3,086                        |       |
| Other intangible  assets, net                                |       | 13,108                           |       | 32,524                       |       |
| Other long-term  assets                                      |       | 18,143                           |       | 10,480                       |       |
| Total assets                                                 |       | $                                | 723,355    |                         | $          | 737,399 |   |
|                                                         |       |                                  |       |                              |       |
| ** Liabilities and Stockholders’ Equity**          |       |                             |       |                         |       |
| Current liabilities:                                         |       |                             |       |                         |       |
| Accounts payable                                             |       | $                                | 35,724     |                         | $          | 40,246 |   |
| Accrued  liabilities                                         |       | 39,244                           |       | 87,722                       |       |
| 3% Convertible  Subordinated Notes                           |       | 10,637                           |       | 10,637                       |       |
| Total current  liabilities                                   |       | 85,605                           |       | 138,605                      |       |
| 3/4% Convertible Senior  Subordinated Notes                  |       | 225,000                          |       | 225,000                      |       |
| Other long-term  liabilities                                 |       | 3,048                            |       | 4,349                        |       |
| Commitments and  contingencies (Note 12)                     |       |                             |       |                         |       |
| Stockholders’ equity:                                   |       |                             |       |                         |       |
| Common stock                                                 |       | 117                              |       | 115                          |       |
| Additional paid-in  capital                                  |       | 183,165                          |       | 174,648                      |       |
| Deferred stock-based  compensation                           |       | —                           |       | (319                         | )          |
| Accumulated  other comprehensive income (loss), net of taxes |       | 843                              |       | (2,781                       | )          |
| Retained  earnings                                           |       | 225,577                          |       | 197,782                      |       |
| Total  stockholders’ equity                             |       | 409,702                          |       | 369,445                      |       |
| Total liabilities and stockholders’ equity              |       | $                                | 723,355    |                         | $          | 737,399 |   |

 

See accompanying Notes to UnauditedCondensed Consolidated Financial Statements.

4

----

                                                                                                

**ADAPTEC, INC.CONDENSED CONSOLIDATED STATEMENTS OF CASH FLOWS(unaudited)**
| ** **                                                                                                     | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                     | ** ** | **September 30,  2006**         | ** ** | **September 30,  2005** | ** ** |
| ** **                                                                                                     | ** ** | **(in thousands)**              | ** ** |
| **Cash Flows From Operating  Activities:**                                                                     |       |                                 |       |   |   |
| Net income (loss)                                                                                              |       | $                                    | 27,795     |   | $ | (141,779 | ) |
| Less: Income (loss)  from discontinued operations                                                              |       | 3,862                                |       | (27,857 | ) |
| Income (loss) from  continuing operations                                                                      |       | 23,933                               |       | (113,922 | ) |
| Adjustments to  reconcile income (loss) from continuing operations to net cash used for  operating activities: |       |                                 |       |   |   |
| Impairment of  intangible assets                                                                               |       | 13,203                               |       | — |   |
| Impairment of  goodwill                                                                                        |       | —                               |       | 90,602 |   |
| Non-cash effect  of tax settlement                                                                             |       | (45,955                              | )          | — |   |
| Stock-based  compensation                                                                                      |       | 4,566                                |       | 351 |   |
| Loss on  extinguishment of debt                                                                                |       | —                               |       | 102 |   |
| Depreciation and  amortization                                                                                 |       | 9,299                                |       | 14,434 |   |
| Other non-cash  items                                                                                          |       | 681                                  |       | (129 | ) |
| Changes in  assets and liabilities                                                                             |       | (15,397                              | )          | (5,679 | ) |
|                                                                                                           |       |                                 |       |   |   |
| **Net Cash Used for Operating  Activities of Continuing Operations**                                           |       | (9,670                               | )          | (14,241 | ) |
| **Net Cash Provided by Operating  Activities of Discontinued Operations**                                      |       | 2,564                                |       | 2,916 |   |
| **Net Cash Used for Operating  Activities**                                                                    |       | $                                    | (7,106     | ) | $ | (11,325 | ) |
|                                                                                                           |       |                                 |       |   |   |
| **Cash Flows From Investing  Activities:**                                                                     |       |                                 |       |   |   |
| Maturities of  restricted marketable securities                                                                |       | 844                                  |       | 844 |   |
| Payment of holdback in  connection with acquisition of Platys                                                  |       | (1,507                               | )          | — |   |
| Purchases of property  and equipment                                                                           |       | (1,845                               | )          | (5,416 | ) |
| Proceeds from the sale  of property and equipment                                                              |       | —                               |       | 2,684 |   |
| Purchases of marketable  securities                                                                            |       | (165,839                             | )          | (438,060 | ) |
| Sales of marketable  securities                                                                                |       | 111,337                              |       | 107,141 |   |
| Maturities of  marketable securities                                                                           |       | 14,029                               |       | 4,511 |   |
| **Net Cash Used for Investing  Activities of Continuing Operations**                                           |       | (42,981                              | )          | (328,296 | ) |
| **Net Cash Used for Investing  Activities of Discontinued Operations**                                         |       | —                               |       | (1,655 | ) |
| **Net Cash Used for Investing  Activities**                                                                    |       | (42,981                              | )          | (329,951 | ) |
| **Cash Flows From Financing  Activities:**                                                                     |       |                                 |       |   |   |
| Repurchases and  redemption of long-term debt                                                                  |       | —                               |       | (22,988 | ) |
| Proceeds from issuance  of common stock                                                                        |       | 4,272                                |       | 2,554 |   |
| **Net Cash Provided by (Used for)  Financing Activities**                                                      |       | 4,272                                |       | (20,434 | ) |
| **Effect of Foreign Currency  Translation on Cash and Cash Equivalents**                                       |       | 1,030                                |       | (853 | ) |
| **Net Decrease in Cash and Cash  Equivalents**                                                                 |       | (44,785                              | )          | (362,563 | ) |
| **Cash and Cash Equivalents at  Beginning of Period**                                                          |       | 131,373                              |       | 441,588 |   |
| **Cash and Cash Equivalents at End of Period**                                                                 |       | $                                    | 86,588     |   | $ | 79,025 |   |

 

Seeaccompanying Notes to Unaudited Condensed Consolidated Financial Statements.

5

----

**ADAPTEC, INC.**

**NOTES TO CONDENSED CONSOLIDATED FINANCIAL STATEMENTS**

**(unaudited)**

**1. Basis of Presentation**

Inthe opinion of management, the accompanying Unaudited Condensed ConsolidatedInterim Financial Statements (“financial statements”) of Adaptec, Inc. andits wholly-owned subsidiaries (collectively, the “Company”) have been preparedon a consistent basis with the March 31, 2006 audited consolidatedfinancial statements and include all adjustments, consisting of only normalrecurring adjustments, necessary to fairly state the information set forththerein. The financial statements have been prepared in accordance with theregulations of the SEC, and, therefore, omit certain information and footnotedisclosure necessary to present the statements in accordance with accountingprinciples generally accepted in the United States of America. These financialstatements should be read in conjunction with the audited consolidatedfinancial statements and notes thereto included in the Company’s Annual Report onForm 10-K for the year ended March 31, 2006, which was filed with theSEC on June 14, 2006. The second quarters of fiscal 2007 and 2006 endedSeptember 29, 2006 and September 30, 2005, respectively. For presentationpurposes, the accompanying financial statements have been shown as ending onSeptember 30. The results of operations for the second quarter of fiscal 2007are not necessarily indicative of the results to be expected for the entirefiscal year.

Asdiscussed in Note 4, in September 2005, the Company sold its IBM i/p SeriesRAID component business (“IBM i/p Series RAID Business”) to InternationalBusiness Machines (“IBM”) and the Company’s Board of Directors approvedmanagement’s recommendation to divest its systems business. Accordingly, theCompany reclassified the financial statements and related disclosures for allperiods presented to reflect the results of IBM i/p Series RAID Business andthe systems business as discontinued operations.  In January 2006, the Company sold theblock-based portion of its systems business to Sanmina-SCI Corporation and itswholly owned subsidiary, Sanmina-SCI USA, Incorporated. In July 2006, andeffective for the end of the first quarter of fiscal 2007, the Company’s Boardof Directors decided to retain the Snap Server portion of the systems businessand management terminated its ongoing efforts to sell this business.Accordingly, the Company has reclassified the financial statements and relateddisclosures for all periods presented to reflect the Snap Server portion of itssystems business as continuing operations.

Unlessotherwise indicated, the Notes to the Unaudited Condensed Consolidated FinancialStatements relate to the discussion of the Company’s continuing operations.

Theglossary of key acronyms used in the Company’s industry and accountingrules and regulations referred to within this Quarterly Report onForm 10-Q is listed in alphabetical order in Note 16.

**2. Recent AccountingPronouncements**

InJune 2006, the FASB issued FIN No. 48, which clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with SFAS No. 109. FIN No. 48 prescribes a recognition threshold andmeasurement attribute for the financial statement recognition and measurementof a tax position taken or expected to be taken in a tax return. Thisinterpretation also provides guidance on derecognition, classification,interest and penalties, accounting in interim periods, disclosure, andtransition. FIN No. 48 is effective beginning with the Company’s fiscal year2008.  The Company is currently assessingthe impact, if any, of FIN No. 48 on its financial position and results ofoperations.

In September 2006, the SEC issuedSAB 108 in order to eliminate the diversity of practice surrounding how publiccompanies quantify financial statement misstatements. Traditionally, there havebeen two widely-recognized methods for quantifying the effects of financialstatement misstatements:  the “roll-over”method and the “iron curtain” method. The “roll-over” method focuses primarily on the impact of a misstatementon the income statement, including the reversing effect of prior periodmisstatements; but its use can lead to the accumulation of misstatements in thebalance sheet.  The “iron-curtain”method, on the other hand, focuses primarily on the effect of correcting theperiod-end balance sheet with less emphasis on the reversing effects of priorperiod errors on the income statement. The Company currently uses the “roll-over” method for quantifyingidentified financial statement misstatements. In SAB 108, the SEC staff established an approach that requiresquantification of financial statement misstatements based on the effects of themisstatements on each of the Company’s financial statements and the relatedfinancial statement disclosures.  Thismodel is commonly referred to as a “dual approach” because it requiresquantification of errors under both the “iron curtain” and the “roll-over”methods. SAB 108 permits existing public companies to initially apply itsprovisions either by (i) restating prior financial statements as if the “dualapproach” had always been used or (ii) recording the cumulative effect ofinitially applying the “dual approach” as adjustments to the carrying values ofassets and liabilities as of April 1, 2006 with an offsetting adjustmentrecorded to the opening balance of retained earnings.  Use of the “cumulative effect” transitionmethod requires detailed disclosure of the nature and amount of each individualerror being corrected through the cumulative adjustment and how and when itarose. The Company will initially apply the provisions of SAB 108 using the “cumulativeeffect” transition method in connection with the preparation of its annualfinancial statements for the year ending March 31, 2007.  The Company is currently evaluatingthe impact of SAB 108 on its financial position and results of operations.

6

----

In September 2006, the FASB issued SFAS No. 157,which defines fair value, establishes a framework and gives guidance regardingthe methods used for measuring fair value, and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interim periodswithin those fiscal years. The Company is currently evaluating the impact ofSFAS No. 157 on its results of operations and financial position.

**3. Stock Benefit Plans andStock-Based Compensation**

**Stock BenefitPlans**

The Company grants stock options and other stock awardsto employees, directors and consultants under two equity incentive plans.  The Company also has an employee stockpurchase plan for all eligible employees. These plans are described in furtherdetail below.

*Employee Stock Purchase Plan:*    TheCompany has authorized 15,600,000 shares of common stock for issuance under the1986 ESPP. Eligible employees may authorize payroll deductions of up to 10% oftheir salary to purchase shares of the Company’s common stock at the lower of85% of the market value of the common stock at the beginning of the 24 monthoffering period or at the end of each applicable six month purchase period. TheCompany issued 0.6 million shares under the ESPP in the second quarter andfirst half of fiscal 2007. As of September 30, 2006, 3.5 million sharesremained available for issuance. As of September 30, 2006, the totalunamortized stock-based compensation expense related to shares issuable underthe ESPP was $1.1 million, and this expense is expected to be recognizedover a remaining weighted-average period of 0.96 years.

*Equity Incentive Plans, including the 2004 EquityIncentive Plan, the 2000 Nonstatutory Stock Option Plan, 1999 Stock Option Planand 1990 Stock Option:  *In August 2004, the Company’sBoard of Directors and its stockholders approved the Company’s 2004 EquityIncentive Plan and reserved for issuance thereunder 10,000,000 shares of theCompany’s common stock plus shares reserved but not issued under the Company’s 2000Nonstatutory Stock Option Plan, 1999 Stock Option Plan and 1990 Stock OptionPlan. The 2004 Equity Incentive Plan provides for the granting of incentivestock options, nonstatutory stock options, restricted stock, stock awards,restricted stock units and stock appreciation rights to employees, employeedirectors and consultants. Stock options are subject to terms and conditions asdetermined by the Compensation Committee of the Company’s Board of Directors.Twenty-five percent of stock options for new hires generally vest and becomeexercisable one year from the date of grant and then vest quarterly thereafterfor the next three years. Stock options expire seven years from the date ofgrant. As of September 30, 2006, the Company had an aggregate of 31.1million shares of its common stock reserved for issuance under its 2004 EquityIncentive Plan, of which 15.3 million shares are subject to outstanding optionsand 15.8 million shares are available for future grants of options and otherstock awards.

*Director Stock Option Plans, including the 2006Director Stock Option Plan, 2000 Director Stock Option Plan and 1990 Directors’Stock Option Plan:  *In September 2006, the Company’sBoard of Directors and its stockholders approved the Company’s 2006 DirectorPlan and reserved for issuance thereunder 1,200,000 shares of the Company’scommon stock plus shares reserved but not issued under the Company’s 2000Director Stock Option Plan and the 1990 Directors’ Stock Option Plan. The 2006Director Plan provides for the granting of non-qualified stock options,restricted stock, restricted stock units and stock appreciation rights tonon-employee directors. Although grants made under the 2006 Director Plan arediscretionary, the Company expects that (1) new non-employee directors willreceive an option to purchase 32,500 shares of the Company’s common stock, inwhich 25% of these stock options will vest and become exercisable one year fromthe date of grant and quarterly thereafter for the next three years, (2)existing non-employee directors will receive an option to purchase 12,500shares of the Company’s common stock on May 31st ofeach year, with such option vesting quarterly over one year, (3) a newnon-employee director will receive 16,250 shares of restricted stock and (4)existing non-employee directors will receive 6,250 shares of restricted stockon May 31st of each year. The restricted stock will fullyvest one year after the date of grant. Stock options expire ten years from thedate of grant. As of September 30, 2006, the Company had an aggregate of2.2 million shares of its common stock reserved for issuance under its 2006Director Plan, of which 0.9 million shares are subject to outstanding optionsand 1.3 million shares are available for future grants.

*Assumed Stock Option Plans:*   TheCompany assumed the stock option plans and the outstanding stock options ofcertain acquired companies, which include Snap Appliance, Inc. in fiscal 2005,Eurologic Systems Group Limited in fiscal 2004, Platys Communications, Inc. infiscal 2002 and Distributed Processing Technology Corporation in fiscal 1999.No further options may be granted under these assumed plans. However, optionsthat were outstanding under these plans will continue to be governed by theirexisting terms and may be exercised for shares of the Company’s common stock atany time prior to the expiration of the option term. As of September 30, 2006,the Company had 0.2 million shares of common stock reserved that are subject tooutstanding options under these assumed plans.

7

----

**Stock-BasedCompensation**

On April 1, 2006,the Company adopted SFAS No. 123(R) using the modified prospective transitionmethod, which requires the Company to measure and recognize compensationexpense for all stock-based awards made to its employees and directors,including employee stock options, employee stock purchase plans, and otherstock-based awards, based on estimated fair values. Accordingly, the CondensedConsolidated Statements of Operations for the second quarter and first half offiscal 2007 reflect the impact of adopting SFAS No. 123(R) and prior periodshave not been restated.

Stock-based compensationexpense recognized in the second quarter and first half of fiscal 2007 includes(a) stock-based award payments granted prior to, but not yet vested as of April1, 2006 based on the grant date fair value estimated in accordance with theoriginal provisions of SFAS No. 123, as adjusted for estimated forfeitures and(b) stock-based award payments granted subsequent to April 1, 2006, based onthe grant-date fair value estimated in accordance with the provisions of SFASNo. 123(R). The Company recognized the stock-based compensation costs for allstock-based awards using a straight-line amortization method over therespective requisite service period of the awards and adjusted it for estimatedforfeitures.

Total compensation expensefor the Company’s stock-based awards in the second quarter and first half of2007 was $2.0 million and $4.6 million, respectively. The following table summarizesthe impact of the adoption of SFAS No. 123(R) on stock-based compensation expenseincluded in the Condensed Consolidated Statements of Operations for the secondquarter and first half of fiscal 2007:
| ** **                                                                                   | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                   | ** ** | **September 30, 2006**       | ** ** | **September 30, 2006**     | ** ** |
| ** **                                                                                   | ** ** | **(in thousands)**                | ** ** |
| ** **                                                                                   | ** ** | ** **                             | ** ** |
| Stock-based  compensation expense by caption:                                                | ** ** | ** **                             | ** ** | ** **                           | ** ** |
| Cost of revenues                                                                             |       | $                                      | 141        |                                 | $          | 329 |   |
| Research and  development                                                                    |       | 865                                    |       | 2,090                                |       |
| Selling,  marketing and administrative                                                       |       | 1,017                                  |       | 2,147                                |       |
| Stock-based compensation expense effect on income  from continuing operations, net of taxes  |       | 2,023                                  |       | 4,566                                |       |
|                                                                                         | ** ** | ** **                             | ** ** | ** **                           | ** ** |
| Stock-based  compensation expense by type of award:                                          | ** ** | ** **                             | ** ** | ** **                           | ** ** |
| Stock options                                                                                |       | $                                      | 1,642      |                                 | $          | 3,546 |   |
| Restricted stock  awards and restricted stock units                                          |       | 263                                    |       | 306                                  |       |
| Employee stock  purchase plan                                                                |       | 118                                    |       | 714                                  |       |
| Stock-based  compensation expense effect on income from continuing operations, net of  taxes |       | 2,023                                  |       | 4,566                                |       |

 

Stock-basedcompensation expense in the above table does not reflect any significant incometaxes, which is consistent with the Company’s treatment of income or loss fromits U.S. operations. As a result of adopting SFAS No. 123(R) on April 1, 2006,the Company’s net income for the second quarter and first half of fiscal 2007was lower by $2.0 million and $4.6 million, respectively, than if the Companyhad continued to account for share-based compensation under APB Opinion No. 25.In addition, prior to adopting SFAS No. 123(R), the Company presented the taxbenefits of stock option exercises as operating cash flows in the CondensedConsolidated Statements of Cash Flows; however, there was no income tax benefitrealized for the tax deductions from option exercises of the share-basedpayment arrangements for the first halves of fiscal 2007 and 2006. Therefore,no amounts were classified from operating to financing cash flows for the firsthalf of fiscal 2006. In addition, there was no stock-based compensation costscapitalized as part of an asset in the second quarter and first halves offiscal 2007 and during fiscal 2006.

Priorto April 1, 2006, the Company accounted for stock-based compensation inaccordance with APB Opinion No. 25 as interpreted by FIN No. 44, andcomplied with the disclosure provisions of SFAS No. 148, an amendment ofSFAS No. 123. Under APB Opinion No. 25, compensation expense wasrecognized on the measurement date based on the excess, if any, of the fairvalue of the Company’s common stock over the amount an employee must pay toacquire the common stock.  Compensationcosts related to restricted stock awards and assumed unvestedacquisition-related stock options, determined to be the fair market value ofthe shares at the date of grant, have been recognized as compensation expenseratably over the respective vesting period. In addition, the employee stockpurchase plan was deemed noncompensatory under APB Opinion No. 25; therefore,no compensation cost was recorded in relation to the discount offered toemployees for purchases made under the employee stock purchase plan. Thefollowing table illustrates the effect on net loss and net loss per share as ifthe Company had applied the fair value recognition provisions of SFAS No. 123,as amended, to account for stock-based compensation for the second quarter andfirst half of fiscal 2006:

8

----

 
| ** **                                                                                               | ** ** | **Three-Month Period Ended**                                | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                               | ** ** | **September 30, 2005**                                      | ** ** | **September 30, 2005**     | ** ** |
| ** **                                                                                               | ** ** | **(in thousands, except per share amounts)** | ** ** |
|                                                                                                     |       |                                                                  |       |                                 |       |
| Net loss, as  reported                                                                                   |       | $                                                                     | (105,806   | )                                    | $          | (141,779 | ) |
| Add: Stock-based  compensation expense previously determined under intrinsic value method, net  of taxes |       | 1,029                                                                 |       | 1,303                                |       |
| Deduct: Stock-based  compensation expense determined under fair value-based method, net of  taxes        |       | (2,884                                                                | )          | (6,380                               | )          |
| Pro forma net  loss                                                                                      |       | $                                                                     | (107,661   | )                                    | $          | (146,856 | ) |
|                                                                                                     |       |                                                                       |       |                                      |       |
| Basic net loss  per share:                                                                               |       |                                                                  |       |                                 |       |
| As reported                                                                                              |       | $                                                                     | (0.94      | )                                    | $          | (1.26 | ) |
| Pro forma                                                                                                |       | $                                                                     | (0.95      | )                                    | $          | (1.30 | ) |
| Diluted net loss  per share:                                                                             |       |                                                                  |       |                                 |       |
| As reported                                                                                              |       | $                                                                     | (0.94      | )                                    | $          | (1.26 | ) |
| Pro forma                                                                                                |       | $                                                                     | (0.95      | )                                    | $          | (1.30 | ) |

 

**ValuationAssumptions**

                Uponadoption of SFAS No. 123(R), the Company selected the Black-Scholes optionpricing model as the most appropriate model for determining the estimated fairvalue for stock-based awards. The use of the Black-Scholes model requires theuse of extensive actual exercise behavior data and the use of a number ofcomplex assumptions including expected volatility, risk-free interest rate,expected term, and expected dividends.

Beginning April 1, 2006, the Company estimatedthe volatility of its stock using historical volatility as well as the impliedvolatility in market-traded options on its common stock in accordance withguidance in SFAS No. 123(R) and SAB 107. Management determined that a blend ofimplied volatility and historical volatility is more reflective of marketconditions and a better indicator of expected volatility than using purelyhistorical volatility. The Company will continue to monitor these and otherrelevant factors used to measure expected volatility for future option grants.Prior to the adoption of SFAS No. 123(R), the Company used its historicalcommon stock price volatility in accordance with SFAS No. 123 for purposes ofpro forma information disclosed in the notes to its consolidated financialstatements for prior periods.

The risk-free interest rate assumption is based uponobserved interest rates using the implied yield currently available on U.S.Treasury zero-coupon issues that is appropriate for the term of the Company’sstock options. The dividend yield assumption is based on the Company’s historyand expectation of dividend payouts.  TheCompany has historically not paid dividends and has no foreseeable plans toissue dividends as it is the Company’s current policy to reinvest earnings forits business.

The expected term of stock options represents theweighted-average period that the stock options are expected to remainoutstanding. The Company derived the expected term assumption based on itshistorical settlement experience, while giving consideration to options thathave life cycles less than the contractual terms and vesting schedules inaccordance with guidance in SFAS No. 123(R) and SAB 107. Prior to theadoption of SFAS No. 123(R), the Company used its historical settlementexperience to derive the expected term for the purposes of pro formainformation under SFAS No. 123, as disclosed in the notes to its consolidatedfinancial statements for the related periods.

 The fair value of the Company’s outstandingstock options was estimated using the following weighted-average assumptions:
| ** **                   | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                   | ** ** | **September 30, 2006**       | ** ** | **September 30, 2005**     | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                   | ** ** | ** **                             | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| Equity Incentive  Plans:     |       |                                   |       |                                 |       |   |   |   |   |
| Expected life  (in years)    |       | 3.87 – 4.22                       |       | 2.5                                  |       | 3.87 – 4.22 |   | 2.5 |   |
| Risk-free  interest rates    |       | 4.60 – 4.89                       | %          | 4.2                                  | %          | 4.60 – 5.11 | % | 4.1 | % |
| Expected  volatility         |       | 44                                     | %          | 39                                   | %          | 44 | % | 38 | % |
| Dividend yield               |       | —                                 |       | —                               |       | — |   | — |   |
| Weighted average  fair value |       | $                                      | 2.38       |                                 | $          | 0.97 |   | $ | 2.65 |   | $ | 0.98 |   |
|                         |       |                                   |       |                                 |       |   |   |   |   |
| ESPP:                        |       |                                   |       |                                 |       |   |   |   |   |
| Expected life  (in years)    |       | 1.00 – 1.25                       |       | 1.1                                  |       | 1.00 – 1.25 |   | 1.1 |   |
| Risk-free  interest rates    |       | 5.07 – 5.11                       | %          | 3.8                                  | %          | 5.07 – 5.11 | % | 3.8 | % |
| Expected  volatility         |       | 44                                     | %          | 39                                   | %          | 44 | % | 39 | % |
| Dividend yield               |       | —                                 |       | —                               |       | — |   | — |   |
| Weighted average fair  value |       | $                                      | 1.11       |                                 | $          | 1.12 |   | $ | 1.11 |   | $ | 1.12 |   |

 

9

----

**Stock BenefitPlans Activities**

*Equity Incentive Plans:*  A summary of optionactivity under all of the Company’s equity incentive plans as of September 30,2006, and changes during the first half of fiscal 2007 is presented below:
| ** **                                                 | ** ** | ** **                                                                                       | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | ** **                   | ** ** |
|------------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                                 | ** ** | ** **                                                                                       | ** ** | ** **                | ** ** | **Remaining**             | ** ** | ** **                   | ** ** |
| ** **                                                 | ** ** | ** **                                                                                       | ** ** | **Weighted Average** | ** ** | **Contractual Term** | ** ** | **Aggregate Intrinsic** | ** ** |
| ** **                                                 | ** ** | **Shares**                                                                                       | ** ** | **Exercise Price**   | ** ** | **(Years)**               | ** ** | **Value**                    | ** ** |
| ** **                                                 | ** ** | **(in thousands except exercise price and contractual term)** | ** ** |
| ** **                                                 | ** ** | ** **                                                                                       | ** ** |
| Outstanding at  March 31, 2006                             |       | 19,942                                                                                           |       | $                         | 8.90       |                      |       |                         |       |   |
| Granted                                                    |       | 1,283                                                                                            |       | 4.39                      |       |                      |       |                         |       |
| Exercised                                                  |       | (754                                                                                             | )          | 3.53                      |       |                      |       |                         |       |
| Forfeited and cancelled                                    |       | (4,164                                                                                           | )          | 9.65                      |       |                      |       |                         |       |
| Outstanding at  September 30, 2006                         |       | 16,307                                                                                           |       | $                         | 8.60       |                      | 3.88       |                         | $          | 4,499 |   |
| Options vested  and expected to vest at September 30, 2006 |       | 15,359                                                                                           |       | $                         | 8.80       |                      | 3.76       |                         | $          | 4,265 |   |
| Options  exercisable at September 30, 2006                 |       | 11,733                                                                                           |       | $                         | 9.89       |                      | 3.38       |                         | $          | 2,917 |   |
|                                                       |       |                                                                                                  |       |                      |       |                      |       |                         |       |

Theaggregate intrinsic value is calculated as the difference between the exerciseprice of the underlying awards and the quoted price of the Company’s commonstock for the 5.7 million options that were in-the-money at September 30, 2006.During the second quarters of fiscal 2007 and 2006, the aggregate intrinsicvalue of options exercised under the Company’s equity incentive plans was $0.3million and $0.0 million, respectively, determined as of the date of optionexercise.   During the first halves offiscal 2007 and 2006, the aggregate intrinsic value of options exercised underthe Company’s equity incentive plans was $0.7 million and $0.5 million,respectively, determined as of the date of option exercise.

The followingtable summarizes information about the Company’s equity incentive plans as ofSeptember 30, 2006**:**

 
| ** **                         | ** ** | **Options Outstanding**                                                                                                | ** ** | **Options Exercisable**                                | ** ** |
|------------------------------------|------------|-----------------------------------------------------------------------------------------------------------------------------|------------|-------------------------------------------------------------|------------|
| **Range of  Exercise Prices** | ** ** | **Number  Outstanding  at 9/30/06**                                                                                    | ** ** | **Weighted Average  Remaining  Contractual Life** | ** ** | **Weighted  Average  Exercise Price** | ** ** | **Number  Exercisable  at 9/30/06** | ** ** | **Weighted  Average  Exercise Price** | ** ** |
| ** **                         | ** ** | **(in thousands except weighted average exercise price and contractual life)** | ** ** |
| ** **                         | ** ** | ** **                                                                                                                  | ** ** |
| $0.18 – $0.18                 |       | 52                                                                                                                          |       | 4.37                                                        |       | $ | 0.18 |   | 52 |   | $ | 0.18 |   |
| $0.35 – $3.45                 |       | 3,494                                                                                                                       |       | 4.05                                                        |       | 3.41 |   | 2,297 |   | 3.40 |   |
| $0.35 – $4.24                 |       | 2,072                                                                                                                       |       | 5.72                                                        |       | 4.03 |   | 786 |   | 3.94 |   |
| $4.26 – $6.25                 |       | 1,690                                                                                                                       |       | 5.44                                                        |       | 5.26 |   | 835 |   | 4.93 |   |
| $6.30 – $7.66                 |       | 2,192                                                                                                                       |       | 3.69                                                        |       | 7.10 |   | 1,361 |   | 6.94 |   |
| $7.70 – $11.94                |       | 1,797                                                                                                                       |       | 4.27                                                        |       | 10.05 |   | 1,454 |   | 10.28 |   |
| $12.20 – $14.60               |       | 1,657                                                                                                                       |       | 2.42                                                        |       | 13.08 |   | 1,598 |   | 13.11 |   |
| $14.68 – $14.90               |       | 310                                                                                                                         |       | 3.73                                                        |       | 14.89 |   | 307 |   | 14.89 |   |
| $15.29 – $15.29               |       | 2,609                                                                                                                       |       | 2.24                                                        |       | 15.29 |   | 2,609 |   | 15.29 |   |
| $15.97 –  $3,473.67           |       | 434                                                                                                                         |       | 2.62                                                        |       | 25.88 |   | 434 |   | 25.88 |   |
|                               |       |                                                                                                                        |       |                                                        |       |   |   |   |   |   |   |
|                               |       | 16,307                                                                                                                      |       | 3.88                                                        |       | $ | 8.60 |   | 11,733 |   | $ | 9.89 |   |
|                               |       |                                                                                                                        |       |                                                        |       |   |   |   |   |   |   |

 

Asof September 30, 2006, the total unamortized stock-based compensation expenserelated to non-vested stock options, net of estimated forfeitures, was $6.4million, and this expense is expected to be recognized over a remainingweighted-average period of 2.05 years. Compensation expenses for allstock-based awards granted are recognized using the straight-line amortizationmethod.

10

----

*Restricted Stock Awards andRestricted Stock Units**:  *Restrictedstock awards and restricted stock units were granted under the Company’s 2004 Equity Incentive Plan and 2006Director Plan. The restricted stock unitsare converted into shares of the Company’s common stock upon vesting.  As of September 30, 2006, there were0.6 million shares of service-based restricted stock awards and 0.1 millionshares of restricted stock units outstanding, all of which are subject toforfeiture if employment terminates prior to the release of restrictions.  Restrictions lapse 50% one year from the dateof grant and the remainder at the second anniversary for restricted stockawards and restricted stock units granted under the 2004 Equity Incentive Plan.Restrictions lapse one year from the date of grant for restricted stock awardsand restricted stock units granted under the 2006 Director Plan. The cost ofthese awards, determined to be the fair market value of the shares at the dateof grant, is expensed ratably over the period the restrictions lapse.

Asummary of activity for restricted stock awards as of September 30, 2006, andchanges during the first half of fiscal 2007 is as follows:
| ** **                             | ** ** | **Shares**                                                                                      | ** ** | **Weighted Average  Grant-Date Fair  Value** | ** ** |
|----------------------------------------|------------|-------------------------------------------------------------------------------------------------|------------|--------------------------------------------------------|------------|
| ** **                             | ** ** | **(in thousands except weighted average  grant-date fair value)** | ** ** |
|                                   |       |                                                                                            |       |                                                   |       |
| Nonvested stock  at March 31,2006      |       | —                                                                                          |       | $                                                      | —     |   |
| Granted                                |       | 627                                                                                             |       | 4.27                                                   |       |
| Vested                                 |       | —                                                                                          |       | —                                                 |       |
| Forfeited                              |       | (32                                                                                             | )          | 4.24                                                   |       |
| Nonvested stock  at September 30, 2006 |       | 595                                                                                             |       | $                                                      | 4.27       |   |
|                                   |       |                                                                                            |       |                                                   |       |

As of September30, 2006, the total unrecognized compensation expense related to non-vestedrestricted stock awards that is expected to vest, net of estimated forfeitures,was $1.6 million.  This expense is expectedto be recognized over a remaining weighted-average period of 1.50 years.

Asummary of activity for restricted stock units as of September 30, 2006, andchanges during the first half of fiscal 2007 is as follows:
| ** **                                               | ** ** | ** **                                                                                       | ** ** | ** **                | ** ** | **Weighted Average** | ** ** | ** **                   | ** ** |
|----------------------------------------------------------|------------|--------------------------------------------------------------------------------------------------|------------|---------------------------|------------|---------------------------|------------|------------------------------|------------|
| ** **                                               | ** ** | ** **                                                                                       | ** ** | ** **                | ** ** | **Remaining **       | ** ** | ** **                   | ** ** |
| ** **                                               | ** ** | ** **                                                                                       | ** ** | **Weighted Average** | ** ** | **Contractual Term** | ** ** | **Aggregate Intrinsic** | ** ** |
| ** **                                               | ** ** | **Shares**                                                                                       | ** ** | **Purchase Price**   | ** ** | **(Years)**               | ** ** | **Value**                    | ** ** |
| ** **                                               | ** ** | **(in thousands except purchase price and contractual term)** | ** ** |
|                                                     |       |                                                                                             |       |                      |       |                      |       |                         |       |
| Nonvested units  at March 31, 2006                       |       | —                                                                                           |       | $                         | —     |                      |       |                         |       |   |
| Granted                                                  |       | 65                                                                                               |       | 0.001                     |       |                      |       |                         |       |
| Vested                                                   |       | —                                                                                           |       | —                    |       |                      |       |                         |       |
| Forfeited and cancelled                                  |       | (3                                                                                               | )          | 0.001                     |       |                      |       |                         |       |
|                                                     |       |                                                                                             |       |                      |       |                      |       |                         |       |
| Nonvested units  at September 30, 2006                   |       | 62                                                                                               |       | $                         | 0.001      |                      | 1.21       |                         | $          | 269 |   |
| Units vested and  expected to vest at September 30, 2006 |       | 46                                                                                               |       | $                         | 0.001      |                      | 1.15       |                         | $          | 205 |   |
|                                                     |       |                                                                                             |       |                      |       |                      |       |                         |       |

Asof September 30, 2006, the total unrecognized compensation expense related tonon-vested restricted stock units that is expected to vest, net of estimatedforfeitures, was $0.2 million.  Thisexpense is expected to be recognized over a remaining weighted-average periodof 1.21 years.

**4. BusinessDispositions**

**IBM i/p Series RAID:**On June 29,2004, the Company completed the acquisition of the IBM i/p Series RAIDBusiness.

OnSeptember 30, 2005, the Company entered into a series of arrangements with IBMpursuant to which the Company sold its IBM i/p Series RAID Business to IBM forapproximately $22.0 million plus $1.3 million for certain fixed assets. Inaddition, IBM

11

----

purchased certainrelated inventory at the Company’s net book value of $0.8 million. Expensesincurred in the transaction primarily included costs of approximately $0.5 millionfor legal and accounting fees. In addition, the Company accrued $0.3 millionfor lease obligations. Under the terms of the agreements, the Company grantedIBM a nonexclusive license to certain intellectual property and sold to IBMsubstantially all of the assets dedicated to the engineering and manufacturingof RAID controllers and connectivity products for the IBM i/p Series RAIDBusiness. Under the terms of the nonexclusive license, IBM will pay royaltiesto the Company for the sale of its board-level products on a quarterly basisthrough March 31, 2007, which will be recognized as contingent consideration indiscontinued operations as earned. In fiscal 2006, the Company receivedroyalties, net of taxes of $5.6 million, which the Company recorded in “Income(loss) from disposal of discontinued operations, net of taxes,” in itsConsolidated Statements of Operations. Additional royalties, net of taxes of $2.4 million and $3.7 million,were recorded in the second quarter and first half of fiscal 2007,respectively.  Through September 30,2006, the Company has recognized a cumulative gain of $1.4 million on thedisposal of the IBM i/p Series RAID Business.

Netrevenues and the components of income (loss) related to the IBM i/p Series RAIDBusiness included in discontinued operations, which were previously included inthe Company’s DPS segment, were as follows:
| ** **                                                     | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **September 30, 2005**       | ** ** | **September 30, 2005**     | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                | ** ** |
| ** **                                                     | ** ** | ** **                             | ** ** |
| Net revenues                                                   |       | $                                      | 15,357     |                                 | $          | 19,809 |   |
| Income (loss) from discontinued operations before income taxes |       | 3,694                                  |       | (14,663                              | )          |
| Benefit from  income taxes                                     |       | (833                                   | )          | (642                                 | )          |
| Income (loss)  from discontinued operations                    |       | $                                      | 4,527      |                                 | $          | (14,021 | ) |

**SystemsBusiness:  **On September 29, 2005, the Company’s Board ofDirectors approved management’s recommendation to divest its systems business,including substantially all of the operating assets and cash flows that wereobtained through the Snap Appliance acquisition in July 2004. Accordingly, theCompany had classified the systems business as a discontinued operation in itsconsolidated financial statements for the three-year period ended March 31,2006 and began pursuing a sale of the systems business.

OnJanuary 31, 2006, the Company sold the block-based portion of its systemsbusiness to Sanmina-SCI Corporation and its wholly owned subsidiary,Sanmina-SCI USA, Inc., for $14.5 million, of which $5.0 million willbe received over the two years following the transaction. In addition,Sanmina-SCI USA agreed to pay the Company contingent consideration of up to anadditional $12.0 million if certain revenue levels are achieved over athree-year period. The Company recorded a gain of $12.1 million on thedisposal of the OEM block-based systems business in the fourth quarter offiscal 2006.

TheCompany received offers from prospective buyers for the Snap Server portion ofits systems business; however, management concluded that the potential valuefrom retaining the operations outweighed the offers received for the business.  As a result, on July 6, 2006, and effectivefor the end of the first quarter of fiscal 2007, the Company’s Board ofDirectors decided  to retain the SnapServer portion of the systems business, and management terminated its ongoingefforts to sell this business. As a result, the Company has reclassified the financial statements and relateddisclosures for all periods presented to reflect the Snap Server portion of itssystems business as continuing operations. In addition, the Company recorded asset impairment charges of $13.2million related to certain acquisition-related intangible assets (Note 6) and$0.7 million of legal and consulting fees incurred in connection with itsefforts that had been undertaken to sell the Snap Server portion of its systemsbusiness, which was recorded in “Other charges” in the Condensed ConsolidatedStatements of Operations in the first half of fiscal 2007.

Netrevenues and the components of income (loss) related to the block-based portionof its systems business included in discontinued operations, were as follows:
| ** **                                                     | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                                                     | ** ** | **September 30, 2006**       | ** ** | **September 30, 2005**     | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                     | ** ** | **(in thousands)**                | ** ** |
| ** **                                                     | ** ** | ** **                             | ** ** |
| Net revenues                                                   |       | $                                      | 418        |                                 | $          | 7,112 |   | $ | 2,036 |   | $ | 17,245 |   |
| Income (loss) from discontinued operations before income taxes |       | (181                                   | )          | (3,568                               | )          | 149 |   | (6,865 | ) |
| Provision for  (benefit from) income taxes                     |       | (49                                    | )          | (73                                  | )          | 17 |   | (5 | ) |
| Income (loss)  from discontinued operations                    |       | $                                      | (132       | )                                    | $          | (3,495 | ) | $ | 132 |   | $ | (6,860 | ) |

 

12

----

**5. Balance Sheets Details**

**Inventories:**
| ** **      | ** ** | **September 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|-----------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **      | ** ** | **(in thousands)**          | ** ** |
| ** **      | ** ** | ** **                       | ** ** |
| Raw materials   |       | $                                | 4,166      |                         | $          | 4,258 |   |
| Work-in-process |       | 4,281                            |       | 4,732                        |       |
| Finished goods  |       | 28,012                           |       | 19,269                       |       |
| Total           |       | $                                | 36,459     |                         | $          | 28,259 |   |

**Accrued Liabilities:**
| ** **                              | ** ** | **September 30, 2006** | ** ** | **March 31, 2006** | ** ** |
|-----------------------------------------|------------|----------------------------------|------------|------------------------------|------------|
| ** **                              | ** ** | **(in thousands)**          | ** ** |
| ** **                              | ** ** | ** **                       | ** ** |
| Tax related                             |       | $                                | 10,646     |                         | $          | 46,704 |   |
| Acquisition  related                    |       | 2,146                            |       | 3,635                        |       |
| Accrued  compensation and related taxes |       | 11,610                           |       | 16,235                       |       |
| Other                                   |       | 14,842                           |       | 21,148                       |       |
| Total                                   |       | $                                | 39,244     |                         | $          | 87,722 |   |

 

**6. Goodwill andOther Intangible Assets**

**Goodwill:  **Goodwillis not amortized, but instead is reviewed annually and whenever events orcircumstances occur which indicate that goodwill might be impaired. Inconnection with the reorganization of the Company’s segments in fiscal 2006, inwhich the organization managed its segments at the product level as opposed toa set of customer-focused products, an assessment of the recoverability ofgoodwill was performed.  Impairment ofgoodwill is tested at the Company’s reporting unit level, which is itsoperating segment level, by comparing each segment’s carrying amount, includinggoodwill, to the fair value of that segment. To determine fair value, theCompany’s review process uses the income or discounted cash flows approach andthe market approach. In performing its analysis, the Company used the bestinformation available under the circumstances, including reasonable andsupportable assumptions and projections. If the carrying amount of the segmentexceeds its implied fair value, goodwill is considered impaired and a secondstep is performed to measure the amount of impairment loss, if any. As a resultof this review, the Company wrote-off the entire balance of goodwill of $90.6million in the second quarter of fiscal 2006. Factors that led to this conclusion included, but were not limited to,industry technology changes experienced in the first half of fiscal 2006 suchas the shift from parallel to serial technology and the migration of corefunctionality to server chipsets; required increased investments that eventuallyled the Company to sell the IBM i/p Series RAID Business in the second quarterof fiscal 2006 and the decision to sell the systems business; continued lossesassociated with the sales of systems products to IBM; and general market conditions.

**Other Intangible Assets:**

 
| ** **                                 | ** ** | **September 30, 2006** | ** ** | **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     |                         | $          | (35,797 | ) | $ | 43,545 |   | $ | (24,218 | ) |
| Customer relationships                     |       | 1,047                            |       | (904                         | )          | 1,047 |   | (773 | ) |
| Trade name                                 |       | 10,774                           |       | (10,407                      | )          | 10,774 |   | (5,858 | ) |
| Subtotal                                   |       | 55,366                           |       | (47,108                      | )          | 55,366 |   | (30,849 | ) |
| Intellectual  property assets and warrants |       | 40,242                           |       | (35,392                      | )          | 40,242 |   | (32,235 | ) |
| Total                                      |       | $                                | 95,608     |                         | $          | (82,500 | ) | $ | 95,608 |   | $ | (63,084 | ) |

 

Amortization of other intangible assets was $3.0million and $4.5 million in the second quarters of fiscal 2007 and 2006,respectively.  Amortization of otherintangible assets was $6.2 million and $9.2 million in the first halves offiscal 2007 and 2006, respectively.  The otherintangible assets related to the Snap Server portion of the systems businesshave been reclassified from discontinued operations to continuing operationsand are included in the numbers above.

13

----

The Company regularly performs reviews to determine iffacts or circumstances are present, either internal or external, which wouldindicate that the carrying values of its long-lived assets are impaired. If anasset is determined to be impaired, the loss is measured based on thedifference between the asset’s fair value and its carrying value. The estimateof fair value of the assets is based on discounting estimated future cash flowsusing a discount rate commensurate with the risks inherent in the Company’scurrent business model. The estimation of the impairment involves numerousassumptions that require judgment by the Company, including, but not limitedto, future use of the assets for Company operations versus sale or disposal ofthe assets and future selling prices for the Company’s products. During thefirst quarter of fiscal 2007, as a result of the decision to retain and operatethe Snap Server portion of the systems business, the Company performed animpairment analysis that indicated that the carrying amount of the long-livedassets exceeded their estimated fair value. This was due in part to the limitedcash flows of the business and a number of uncertainties, which included thesignificant research and development expenditures necessary to grow the revenueof the Snap Server portion of the systems business and the significantuncertainties associated with achieving such growth in revenue. This resultedin an impairment charge of $13.2 million in “Other charges” in the in theCondensed  Consolidated Statements ofOperations, of which $5.6 million, $3.1 million and $4.5 million related to theCompany’s intangible assets for existing technology, core technology, andtrademarks, respectively.

The annual amortization expenseof the other intangible assets that existed as of September 30, 2006 isexpected to be as follows:
| ** **                   | ** ** | **Estimated Amortization Expense**    | ** ** |
|------------------------------|------------|-------------------------------------------------|------------|
| ** **                   | ** ** | **Acquisition-related  intangible assets** | ** ** | **Intellectual  property assets** | ** ** |
| ** **                   | ** ** | **(in thousands)**                         | ** ** |
| Fiscal years:                |       |                                            |       |   |   |
| 2007 (remaining  six months) |       | $                                               | 2,938      |   | $ | 3,159 |   |
| 2008                         |       | 2,892                                           |       | 1,691 |   |
| 2009                         |       | 2,395                                           |       | — |   |
| 2010                         |       | 33                                              |       | — |   |
| 2011 and  thereafter         |       | —                                          |       | — |   |
| Total                        |       | $                                               | 8,258      |   | $ | 4,850 |   |

 

**7. Interest andOther Income**

The components of interest and otherincome for the second quarters and first halves of fiscal 2007 and 2006, wereas follows:
| ** **                  | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|-----------------------------|------------|----------------------------------------|------------|--------------------------------------|------------|
| ** **                  | ** ** | **September 30, 2006**       | ** ** | **September 30, 2005**     | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                  | ** ** | **(in thousands)**                | ** ** |
|                        |       |                                   |       |                                 |       |   |   |   |   |
| Interest income             |       | $                                      | 5,813      |                                 | $          | 3,969 |   | $ | 11,506 |   | $ | 7,543 |   |
| Loss on  redemption of debt |       | —                                 |       | (16                                  | )          | — |   | (102 | ) |
| Transaction  gains (losses) |       | (45                                    | )          | (63                                  | )          | 134 |   | (380 | ) |
| Other                       |       | 57                                     |       | 633                                  |       | 88 |   | 1,070 |   |
| Total                       |       | $                                      | 5,825      |                                 | $          | 4,523 |   | $ | 11,728 |   | $ | 8,131 |   |
|                        |       |                                        |       |                                      |       |  |   |  |   |

In the second quarter of fiscal2006, the Company repurchased $3.4millionin aggregate principal amount of its 3% Convertible Subordinated Notes (“3%Notes”) on the open market for an aggregate price of $3.4 million,resulting in an immaterial loss.  In thefirst half of fiscal 2006, the Company repurchased $23.2 million in aggregateprincipal amount of its 3% Notes on the open market for an aggregate price of$23.1 million, resulting in an immaterial loss.  The loss on extinguishment of debt has beenincluded in “Interest and other income” in the Company’s Condensed ConsolidatedStatements of Operations.

**8. RestructuringCharges**

In the first and second quarters of fiscal 2007,management approved and initiated plans to restructure the operations of theCompany by simplifying its infrastructure. The first quarter of fiscal 2007 restructuring plan eliminated certainduplicative resources in all functions of the organization worldwide, due toconsolidating certain processes and vacating redundant facilities in order toreduce the Company’s cost structure, resulting in a restructuring charge of$3.0 million. The second quarter of fiscal 2007 restructuring plan vacatedanother redundant facility and involuntarily terminated employees primarilyrelated to research and development activities, resulting in a restructuringcharge of $0.9 million.

14

----

The Company also recorded provision adjustments of$0.2 million in the second quarter and first half of fiscal 2007 relatedprimarily to additional lease costs based on the estimated loss on facilitiesthat the Company subleased and asset impairments associated with theidentification of duplicative assets. This was partially offset by severanceand benefits as actual costs were lower than anticipated. These provisionadjustments pertained to the restructuring plans that the Company implementedin the first quarter of fiscal 2007, and restructuring plans that itimplemented in fiscal 2006, fiscal 2003, fiscal 2002 and fiscal 2001. Allexpenses, including adjustments, associated with the Company’s restructuringplans are included in “Restructuring charges” in the Condensed ConsolidatedStatements of Operations and are not allocated to segments but rather managedat the corporate level.  For a completediscussion of all restructuring actions that were implemented prior to fiscal2007, please refer to the Notes to Consolidated Financial Statements includedin the Company’s Annual Report on Form 10-K for the year ended March 31, 2006.

The activity in the accruedrestructuring reserves, excluding acquisition-related restructuring, was asfollows for the first half of fiscal 2007:
| ** **                              | ** ** | **Severance And**  | ** ** | ** **             | ** ** | ** ** | ** ** |
|-----------------------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| ** **                              | ** ** | **Benefits**            | ** ** | **Other Charges** | ** ** | **Total**  | ** ** |
| ** **                              | ** ** | **(in thousands)** | ** ** |
| ** **                              | ** ** | ** **              | ** ** |
| Reserve balance  at March 31, 2006 |       | $                       | 1,185      |                   | $          | 1,586      |       | $ | 2,771 |   |
| Q1’07  Restructuring Plan          |       | 2,927                   |       | 101                    |       | 3,028      |       |
| Q2’07  Restructuring Plan          |       | 881                     |       | —                 |       | 881        |       |
| Provision  adjustments                  |       | (101                    | )          | 288                    |       | 187        |       |
| Non-cash charges                        |       | —                  |       | (225                   | )          | (225       | )          |
| Cash paid                               |       | (4,334                  | )          | (540                   | )          | (4,874     | )          |
| Reserve balance at  September 30, 2006  |       | $                       | 558        |                   | $          | 1,210      |       | $ | 1,768 |   |
|                                    |       |                    |       |                   |       |       |       |

The Company anticipates that theremaining restructuring severance and benefits balance of $0.6 million will besubstantially paid out by the third quarter of fiscal 2007 while the remainingrestructuring other charges balance of $1.2 million , relating primarily tolong term leases, will be paid out through fiscal 2009.  The remaining restructuring reserve balanceis reflected both in “Accrued liabilities” and “Other long-term liabilities” inthe Condensed Consolidated Balance Sheets.

***Acquisition-Related Restructuring:***    Duringthe first quarter of fiscal 2006, the Company finalized its Snap Applianceintegration plan to eliminate certain duplicative resources, includingseverance and benefits in connection with the involuntary termination ofapproximately 24 employees, exiting duplicative facilities and disposing ofduplicative assets. The acquisition-related restructuring liabilities wereaccounted for under EITF No. 95-3 and therefore were included in thepurchase price allocation. The Company recorded a total liability of $6.7million for these activities, of which the original estimate of$6.0 million was recorded in the second quarter of fiscal 2005 andadjustments were recorded in each subsequent quarter through the first quarterof fiscal 2006 totaling $0.7 million. Any further changes to the Company’sfinalized plan will be accounted for under SFAS No. 146 and will be recorded in“Restructuring charges” in the Condensed Consolidated Statements of Operations.In the third quarter of fiscal 2006, the Company recorded additionaladjustments of $0.2 million due to additional lease costs related to theestimated loss of facilities that the Company subleased. As of September 30,2006, the Company had utilized $4.5 million of these charges. The Companyanticipates that the remaining restructuring reserve balance of$2.4 million will be paid out by the third quarter of fiscal 2012,primarily related to long-term facility leases.

Theactivity in the accrued restructuring reserve related to the Snap Applianceacquisition-related restructuring plan was as follows for the first half offiscal 2007:

 
| ** **                                                  | ** ** | **Severance And**  | ** ** | ** **             | ** ** | ** ** | ** ** |
|-------------------------------------------------------------|------------|-------------------------|------------|------------------------|------------|------------|------------|
| ** **                                                  | ** ** | **Benefits**            | ** ** | **Other Charges** | ** ** | **Total**  | ** ** |
| ** **                                                  | ** ** | **(in thousands)** | ** ** |
| ** **                                                  | ** ** | ** **              | ** ** |
| **Snap  Appliance Acquisition-Related Restructuring Plan:** | ** ** | ** **              | ** ** | ** **             | ** ** | ** ** | ** ** |
| Reserve balance  at March 31, 2006                          |       | $                       | 46         |                   | $          | 2,489      |       | $ | 2,535 |   |
| Cash paid                                                   |       | —                  |       | (170                   | )          | (170       | )          |
| Reserve balance at  September 30, 2006                      |       | $                       | 46         |                   | $          | 2,319      |       | $ | 2,365 |   |

 

15

----

**9.  Net Income (Loss) Per Share**

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

A reconciliation of thenumerator and denominator of the basic and diluted income (loss) per sharecomputations were as follows: 
| ** **                                                                                                                   | ** ** | **Three-Month Period Ended**                                | ** ** | **Six-Month Period Ended** | ** ** |
|------------------------------------------------------------------------------------------------------------------------------|------------|-----------------------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                                                                                                   | ** ** | **September 30, 2006**                                      | ** ** | **September 30, 2005**     | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| ** **                                                                                                                   | ** ** | **(in thousands, except per share amounts)** | ** ** |
| ** **                                                                                                                   | ** ** | ** **                                                            | ** ** |
| **Numerators:**                                                                                                              |       |                                                                  |       |                                 |       |   |   |   |   |
| Income (loss) from continuing operations—basic                                                                          |       | $                                                                     | 48,757     |                                 | $          | (99,862 | ) | $ | 23,933 |   | $ | (113,922 | ) |
| Income (loss) from discontinued operations—basic                                                                        |       | 2,308                                                                 |       | (5,944                               | )          | 3,862 |   | (27,857 | ) |
| Net income (loss)—basic                                                                                                 |       | $                                                                     | 51,065     |                                 | $          | (105,806 | ) | $ | 27,795 |   | $ | (141,779 | ) |
|                                                                                                                         |       |                                                                  |       |                                 |       |   |   |   |   |
| Adjustments:                                                                                                                 |       |                                                                  |       |                                 |       |   |   |   |   |
| Adjustment for interest expense on 3⁄4% Convertible  Senior Subordinated Notes (“3⁄4% Notes”) , net of taxes |       | $                                                                     | 762        |                                 | $          | — |   | $ | 1,524 |   | $ | — |   |
| Adjustment for interest expense on 3% Notes, net of  taxes                                                                   |       | 100                                                                   |       | —                               |       | — |   | — |   |
| Total adjustments for interest expense on  convertible notes, net of taxes                                                   |       | $                                                                     | 862        |                                 | $          | — |   | $ | 1,524 |   | $ | — |   |
|                                                                                                                         |       |                                                                  |       |                                 |       |   |   |   |   |
| Adjusted income (loss) from continuing operations—diluted                                                               |       | $                                                                     | 49,619     |                                 | $          | (99,862 | ) | $ | 25,457 |   | $ | (113,922 | ) |
| Adjusted income (loss) from discontinued  operations—diluted                                                            |       | 2,308                                                                 |       | (5,944                               | )          | 3,862 |   | (27,857 | ) |
| Adjusted net income (loss)—diluted                                                                                      |       | $                                                                     | 51,927     |                                 | $          | (105,806 | ) | $ | 29,319 |   | $ | (141,779 | ) |
|                                                                                                                         |       |                                                                  |       |                                 |       |   |   |   |   |
| **Denominators:**                                                                                                            |       |                                                                  |       |                                 |       |   |   |   |   |
| Weighted average shares outstanding—basic                                                                               |       | 116,325                                                               |       | 112,965                              |       | 115,967 |   | 112,705 |   |
| Effect of dilutive securities:                                                                                               |       |                                                                  |       |                                 |       |   |   |   |   |
|                                                                                                                         |       |                                                                  |       |                                 |       |   |   |   |   |
| Stock options                                                                                                                |       | 491                                                                   |       | —                               |       | 800 |   | — |   |
| 3⁄4% Notes                                                                                                                |       | 19,224                                                                |       | —                               |       | 19,224 |   | — |   |
| 3% Notes                                                                                                                     |       | 695                                                                   |       | —                               |       | — |   | — |   |
| Weighted average shares and potentially dilutive  common shares outstanding—diluted                                     |       | 136,735                                                               |       | 112,965                              |       | 135,991 |   | 112,705 |   |
|                                                                                                                         |       |                                                                  |       |                                 |       |   |   |   |   |
| Income (loss)  per share:                                                                                                    |       |                                                                  |       |                                 |       |   |   |   |   |
| Basic                                                                                                                        |       |                                                                  |       |                                 |       |   |   |   |   |
| Continuing operations                                                                                                        |       | $                                                                     | 0.42       |                                 | $          | (0.88 | ) | $ | 0.21 |   | $ | (1.01 | ) |
| Discontinued operations                                                                                                      |       | $                                                                     | 0.02       |                                 | $          | (0.05 | ) | $ | 0.03 |   | $ | (0.25 | ) |
| Net income (loss)                                                                                                            |       | $                                                                     | 0.44       |                                 | $          | (0.94 | ) | $ | 0.24 |   | $ | (1.26 | ) |
| Diluted                                                                                                                      |       |                                                                  |       |                                 |       |   |   |   |   |
| Continuing operations                                                                                                        |       | $                                                                     | 0.36       |                                 | $          | (0.88 | ) | $ | 0.19 |   | $ | (1.01 | ) |
| Discontinued operations                                                                                                      |       | $                                                                     | 0.02       |                                 | $          | (0.05 | ) | $ | 0.03 |   | $ | (0.25 | ) |
| Net income  (loss)                                                                                                           |       | $                                                                     | 0.38       |                                 | $          | (0.94 | ) | $ | 0.22 |   | $ | (1.26 | ) |

 

Certain potential common shares were excluded from thediluted computation from continuing operations, discontinued operations and netincome for the second quarter and first half of fiscal 2007 because theirinclusion would have been anti-dilutive. In addition, diluted loss per sharefrom continuing operations, discontinued operations and net loss for the secondquarter and first half of fiscal 2006 was based only on the weighted-averagenumber of shares outstanding during these periods, as the inclusion of anycommon stock equivalents would have been anti-dilutive. The items excluded forthe second quarters and first halves of fiscal 2007 and 2006 were as follows:

 

16

----

** **

 

 
| ** **                                     | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended**   | ** ** |
|------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                     | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                                     | ** ** | **(in thousands)**           | ** ** |
| Outstanding employee  stock options            |       | 12,552                       |       | 19,461                       |       | 12,825 |   | 19,820 |   |
| Outstanding restricted  stock awards and units |       | 8                            |       | —                       |       | 4 |   | — |   |
| Warrants(1)                                    |       | 19,874                       |       | 19,874                       |       | 19,874 |   | 19,874 |   |
| 3⁄4% Notes                                  |       | —                       |       | 19,224                       |       | — |   | 19,224 |   |
| 3% Notes                                       |       | —                       |       | 880                          |       | 695 |   | 1,154 |   |

----

(1) In connection with the issuance ofits 3⁄4% Notes due 2023, the Companyentered into a derivative financial instrument to repurchase up to 19,224,000shares of its common stock, at the Company’s option, at specified prices in thefuture to mitigate any potential dilution as a result of the conversion of the 3⁄4% Notes. For further discussion on thisderivative financial instrument, please refer to Note 6 of the Notes toConsolidated Financial Statements in the Company’s Annual Report on Form 10-Kfor the year ended March 31, 2006.

**10.Comprehensive Income (Loss)**

The Company’s comprehensiveincome (loss), which consisted of net income (loss) and the changes in netunrealized gains (losses) on marketable securities and foreign currencytranslation adjustments were as follows:

 
| ** **                                                            | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended**   | ** ** |
|-----------------------------------------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                                                            | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                                                            | ** ** | **(in thousands)**           | ** ** |
| Net income  (loss)                                                    |       | $                            | 51,065     |                         | $          | (105,806 | ) | $ | 27,795 |   | $ | (141,779 | ) |
| Net unrealized  gains (losses) on marketable securities, net of taxes |       | 3,222                        |       | (1,231                       | )          | 2,569 |   | (810 | ) |
| Foreign currency  translation adjustment, net of taxes                |       | 182                          |       | (157                         | )          | 1,055 |   | (962 | ) |
| Comprehensive  income (loss), net of taxes                            |       | $                            | 54,469     |                         | $          | (107,194 | ) | $ | 31,419 |   | $ | (143,551 | ) |

 

The components of accumulatedother comprehensive income (loss) were as follows:

 
| ** **                                  | ** ** | **September 30,  2006** | ** ** | **March 31,  2006** | ** ** |
|---------------------------------------------|------------|------------------------------|------------|--------------------------|------------|
| ** **                                  | ** ** | **(in thousands)**      | ** ** |
| Unrealized  losses on marketable securities |       | $                            | (669       | )                        | $          | (3,233 | ) |
| Foreign currency  translation               |       | 1,512                        |       | 452                      |       |
| Total                                       |       | $                            | 843        |                     | $          | (2,781 | ) |

 

**11. Income Taxes**

Income tax provisions for interim periods are based onthe Company’s estimated annual income tax rate. The estimated annual tax forfiscal 2007 includes foreign taxes related to the Company’s foreignsubsidiaries, certain state minimum taxes, interest accrued on prior years’ taxdisputes and the tax allocation between the Company’s continuing anddiscontinued operations. This resulted in a tax benefit of $3.1 million for thesecond quarter of fiscal 2007. In addition, the Company settled certain tax disputeswith the U.S. and Singapore taxing authorities, including the resolution of theCompany’s fiscal 1997 U.S. Tax Court Litigation, which resulted in a discretetax benefit of $46.0 million that was recorded in the second quarter of fiscal2007. The estimated annual tax for fiscal 2006 consists of foreign taxesrelated to the Company’s foreign subsidiaries, certain state minimum taxes andinterest accrued on prior years’ tax disputes. A portion of those disputes wasresolved in fiscal 2007. The Company currently has a full valuation allowanceon its net U.S. deferred tax assets. The Company is in ongoing negotiationswith the U.S. and Singapore taxing authorities with regard to its various taxdisputes. The Company’s tax rate for the period in which a settlement isreached is impacted if the settlement materially differs from the amountspreviously accrued.

17

----

 

**12. Commitmentsand Contingencies**

TheCompany has been, or is, subject to IRS audits for its fiscal years 1994through 2003. The fiscal 1994 through fiscal 1996 cycle and fiscal 1997 cycle,which are docketed in the United States Tax Court, were resolved in December2001 and September 2006, respectively. The outcome of the fiscal 1994 throughfiscal 1996 cycle did not have a material adverse effect on the Company’sfinancial position or results of operations, as sufficient tax provisions hadbeen made. The outcome of the fiscal 1997 cycle resulted in the release of taxreserves in September 2006. The final Tax Court stipulations will be filed whenthe subsequent audit cycles are completed. Tax credits that were generated butnot used in subsequent years may be carried back to the respective fiscal 1994through 1996 and fiscal 1997 audit cycles. In addition, in fiscal 2005, theCompany resolved all issues for fiscal 1998 through fiscal 2001 audit cycles,other than the tax credits that were generated but not used in subsequent yearsthat may be carried back. The IRS is currently auditing the Company’s Federalincome tax returns for the fiscal 2002 and 2003 audit cycle. The Companybelieves that it has provided sufficient tax provisions for these years and theultimate outcome of the IRS audits will not have a material adverse impact onits financial position or results of operations in future periods. However, theCompany cannot predict with certainty how these matters will be resolved andwhether it will be required to make additional tax payments.

TheCompany is a party to other litigation matters and claims, including thoserelated to intellectual property, which are normal in the course of itsoperations, and while the results of such litigation matters and claims cannotbe predicted with certainty, the Company believes that the final outcome ofsuch matters will not have a material adverse impact on its financial positionor results of operations. However, because of the nature and inherentuncertainties of litigation, should the outcome of these actions beunfavorable, the Company’s business, financial condition, results of operationsand cash flows could be materially and adversely affected.

Inconnection 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 theacquisition dates. As of September 30, 2006, the Company has assertedclaims against the Snap Appliance and Eurologic Holdbacks totaling $3.0 millionand $1.5 million, respectively. The remainder of the Platys Holdback of $0.7million was paid in the second quarter of fiscal 2007. The Elipsan Holdback of$2.0 million was paid in the second quarter of fiscal 2006.

**13. Guarantees**

*Intellectual Property Indemnification Obligations*

The Company has entered into agreements with customersand suppliers that include intellectual property indemnification obligations.These indemnification obligations generally require the Company to compensatethe other party for certain damages and costs incurred as a result of thirdparty intellectual property claims arising from these transactions. In each ofthese circumstances, payment by the Company is conditional on the other partymaking a claim pursuant to the procedures specified in the particular contract,which procedures typically allow the Company to challenge the other party’sclaims. Further, the Company’s obligations under these agreements may belimited in terms of time and/or amount, and in some instances, the Company mayhave recourse against third parties for certain payments made by it under theseagreements. It is not possible to make a reasonable estimate of the maximumpotential amount of future payments under these or similar agreements due tothe conditional nature of the Company’s obligations and the unique facts andcircumstances involved in each particular agreement. Historically, the Companyhas not incurred significant costs to defend lawsuits or settle claims relatedto such agreements and no amount has been accrued in the accompanying financialstatements with respect to these indemnification guarantees.

*Product Warranty*

TheCompany provides an accrual for estimated future warranty costs based upon thehistorical relationship of warranty costs to sales. The estimated futurewarranty obligations related to product sales are recorded in the period inwhich the related revenue is recognized. The estimated future warrantyobligations are affected by product failure rates, material usage andreplacement costs incurred in correcting a product failure. If actual productfailure rates, material usage or replacement costs differ from the Company’sestimates, revisions to the estimated warranty obligations would be required;however, the Company made no adjustments to pre-existing warranty accruals inthe second quarters and first halves of fiscal 2007 and 2006.

18

----

 

A reconciliationof the changes to the Company’s warranty accrual for the first halves of fiscal2007 and 2006 was as follows:
| ** **                                             | ** ** | **Six-Month  Period Ended**  | ** ** |
|--------------------------------------------------------|------------|------------------------------|------------|
| ** **                                             | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                                             | ** ** | **(in thousands)**      | ** ** |
| Balance at  beginning of period(1)                     |       | $                            | 2,051      |   | $ | 2,084 |   |
| Warranties  provided                                   |       | 2,086                        |       | 2,745 |   |
| Actual costs  incurred                                 |       | (2,561                       | )          | (2,880 | ) |
| Warranties  classified as liabilities held for sale(1) |       | —                       |       | (183 | ) |
| Balance at end of  period(1)                           |       | $                            | 1,576      |   | $ | 1,766 |   |

----

(1)  The table presented above hasbeen updated to reflect the decision to retain and operate the Snap Serverportion of the systems business. As a result, the Company has reclassified thefinancial statements and related disclosures to reflect the Snap Server portionof its systems business as continuing operations.

**14. SegmentReporting**

Duringthe first quarter of fiscal 2007, as a result of retaining the Snap Serverportion of the systems business, the Company reorganized its segments by addingan additional segment. For the period ended September 30, 2006, the Companyoperated in three reportable segments: DPS, DSG and SSG. A description of thetypes of customers or products and services provided by each reportable segmentis as follows:

• DPS provides storage products and currently sells all of its storagetechnologies in various form factors, such as board-level products, ASICs andstand-alone software. The Company sells these products directly to OEMs,ODMs that supply OEMs, VARs and end users through its network ofdistribution and reseller customers.

• DSG provides high-performance I/O connectivity and digital media productsfor personal computing platforms, including notebook and desktop PCs. TheCompany sells these products to retailers, OEMs and distributors.

• SSG primarily provides Snap Server products, including NAS hardware andrelated software. The Company sells these products to VARs and end usersthrough its network of distribution and reseller channels.

Theunallocated corporate income and expenses, which are in the “Other” category,include amortization of acquisition-related intangible assets, restructuring charges,goodwill impairment, other charges, interest and other income, interestexpense, all administrative expenses and certain research and development,selling and marketing expenses.

Summarizedfinancial information on the Company’s reportable segments is shown in thefollowing table. There were no inter-segment revenues for the periods shownbelow. The Company does not separately track all tangible assets ordepreciation by operating segments nor are the segments evaluated under thesecriteria. Segment financial information is summarized as follows for the secondquarters and first halves of fiscal 2007 and 2006:

 
| ** **                                    | ** ** | **DPS**                 | ** ** | **DSG** | ** ** | **SSG** | ** ** | **Other** | ** ** | **Total** | ** ** |
|-----------------------------------------------|------------|-------------------------|------------|---------|------------|---------|------------|-----------|------------|-----------|------------|
| ** **                                    | ** ** | **(in thousands)** | ** ** |
| Three-Month  Period Ended September 30, 2006: |       |                    |       |    |       |    |       |      |       |      |       |
| Net revenues                                  |       | $                       | 62,945     |    | $          | 4,534   |       | $         | 6,074      |      | $          | — |   | $ | 73,553 |   |
| Segment income (loss)                         |       | 16,861                  |       | 697     |       | (3,604  | )          | (14,277   | )          | (323      | )          |
| Three-Month  Period Ended September 30, 2005: |       |                    |       |    |       |    |       |      |       |      |       |
| Net revenues                                  |       | $                       | 73,813     |    | $          | 11,124  |       | $         | 7,651      |      | $          | — |   | $ | 92,588 |   |
| Segment income (loss)                         |       | 16,766                  |       | (1,094  | )          | (993    | )          | (111,869  | )          | (97,190   | )          |
| Six-Month  Period Ended September 30, 2006:   |       |                    |       |    |       |    |       |      |       |      |       |
| Net revenues                                  |       | $                       | 119,053    |    | $          | 9,737   |       | $         | 13,834     |      | $          | — |   | $ | 142,624 |   |
| Segment income (loss)                         |       | 24,131                  |       | 1,616   |       | (4,698  | )          | (45,302   | )          | (24,253   | )          |
| Six-Month  Period Ended September 30, 2005:   |       |                    |       |    |       |    |       |      |       |      |       |
| Net revenues                                  |       | $                       | 138,984    |    | $          | 19,916  |       | $         | 17,501     |      | $          | — |   | $ | 176,401 |   |
| Segment income  (loss)                        |       | 26,016                  |       | (1,472  | )          | (1,479  | )          | (133,469  | )          | (110,404  | )          |

 

19

----

The following table presents the details ofunallocated corporate income and expenses for the second quarters and firsthalves of fiscal 2007 and 2006:
| ** **                           | ** ** | **Three-Month Period Ended** | ** ** | **Six-Month Period Ended**   | ** ** |
|--------------------------------------|------------|------------------------------|------------|------------------------------|------------|
| ** **                           | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                           | ** ** | **(in thousands)**      | ** ** |
| Unallocated  corporate expenses, net |       | $                            | (18,134    | )                            | $          | (24,445 | ) | $ | (37,233 | ) | $ | (48,640 | ) |
| Restructuring  charges               |       | (1,085                       | )          | (478                         | )          | (4,096 | ) | (518 | ) |
| Goodwill  impairment                 |       | —                       |       | (90,602                      | )          | — |   | (90,602 | ) |
| Other charges                        |       | —                       |       | —                       |       | (13,942 | ) | — |   |
| Interest and  other income           |       | 5,825                        |       | 4,523                        |       | 11,728 |   | 8,131 |   |
| Interest expense                     |       | (883                         | )          | (867                         | )          | (1,759 | ) | (1,840 | ) |
|  Total                          |       | $                            | (14,277    | )                            | $          | (111,869 | ) | $ | (45,302 | ) | $ | (133,469 | ) |

 

**15. SupplementalDisclosure of Cash Flows**
| ** **                                        | ** ** | **Six-Month  Period Ended**  | ** ** |
|---------------------------------------------------|------------|------------------------------|------------|
| ** **                                        | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| ** **                                        | ** ** | **(in thousands)**      | ** ** |
| Non-cash  investing and financial activities:     |       |                         |       |   |   |
| Adjustment for  deferred stock-based compensation |       | $                            | —     |   | $ | 414 |   |
| Unrealized loss on  available-for-sale securities |       | 2,569                        |       | (810 | ) |
|                                                   |            |                              |            |  |  |  |  |

 

**16. Glossary**

The following is a list of business related acronymsthat are contained within this Quarterly Report on Form 10-Q. They arelisted in alphabetical order.

·                  **ASIC:** Application Specific IntegratedCircuit

·                  **ATA:** Advanced Technology Attachment

·                  **DPS:** Data Protection Solutions

·                  **DSG:** Desktop Solutions Group

·                  **ESPP:** Employee Stock Purchase Plan

·                  **I/O:** Input/Output

·                  **IP:** Internet Protocol

·                  **IPsec:** Internet Protocol Security

·                  **IRS:******InternalRevenue Service

·                  **iSCSI:** Internet Protocol SCSI

·                  **NAS:** Network Attached Storage

·                  **ODM:** Original Design Manufacturer

·                  **OEM:** Original Equipment Manufacturer

·                  **PC:** Personal Computer

·                  **PCI:** Peripheral Component Interconnect

·                  **RAID:** Redundant Array of Independent Disks

·                  **ROC:** RAID on a Chip

·                  **SAS:** Serial Attached SCSI

·                  **SATA:** Serial Advanced Technology Attachment

·                  **SCSI:** Small Computer System Interface

·                  **SMI-S:** Storage Management InitiativeSpecification

·                  **SSG:** Storage Solutions Group

·                  **Ultra DMA:** Ultra Direct Memory Access

·                  **USB:** Universal Serial Bus

·                  **VAR:** Value Added Reseller

20

----

 

The following is a list of accounting rules andregulations and related regulatory bodies referred to within this QuarterlyReport on Form 10-Q. They are listed in alphabetical order.

·                  **APB:** Accounting Principles Board

·                  **APB Opinion No. 25:**Accounting forStock Issued to Employees

·                  **ARB:**Accounting Research Bulletin

·                  **EITF:** Emerging Issues Task Force

·                  **EITF No. 95-3:**Recognition ofLiabilities in Connection with Purchase Business Combinations

·                  **FASB:** Financial Accounting Standards Board

·                  **FIN:** FASB Interpretation Number

·                  **FIN No. 44:**Accounting for CertainTransactions involving Stock Compensation — an interpretation of APB OpinionNo. 25

·                  **FIN No. 48:**Accounting for Uncertainty inIncome Taxes

·                  **SAB:**Staff Accounting Bulletin

·                  **SAB 107:**Share Based Payment

·                  **SAB 108:**Considering the Effects of PriorYear Misstatements when Quantifying Misstatements in Current Year FinancialStatements

·                  **SEC:** Securities Exchange Commission

·                  **SFAS:** Statement of Financial AccountingStandards

·                  **SFAS No. 109:**Accounting for IncomeTaxes

·                  **SFAS No. 123:**Accounting forStock-Based Compensation

·                  **SFAS No. 123(R):**Share Based Payment

·      **SFAS No. 146:**Accounting for CostsAssociated with Exit or Disposal Activities

·                  **SFAS No. 148:**Accounting forStock-Based Compensation — Transition and Disclosure

·                  **SFAS No**.**157:** Fair Value Measurements

 

21

----

**Item 2. Management’s Discussion and Analysis of FinancialCondition and Results of Operations**

ThisQuarterly Report on Form 10-Q contains forward-looking statements thatinvolve risks and uncertainties. The statements contained in this document thatare not purely historical are forward-looking statements within the meaning ofSection 27A of the Securities Act of 1933 and Section 21E of theSecurities Exchange Act of 1934, including, without limitation, statementsregarding our expectations, beliefs, intentions or strategies regarding ourbusiness, including, but not limited to, our expected reduction in annualintrastructure expenses, expected revenues from our DSG segment, our plans tomigrate certain foreign operations from Singapore to the Republic of Irelandand the Cayman Islands during the second half of fiscal 2007 and our liquidityin 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 thisdocument are based on information available to us on the date hereof, and weassume no obligation to update any such forward-looking statements, except asmay otherwise be required by law.

Ouractual results could differ materially from those anticipated in theseforward-looking statements as a result of certain factors, including those setforth in the “Risk Factors” section and elsewhere in this document. Inevaluating our business, current and prospective investors should considercarefully these factors in addition to the other information set forth in thisreport.

Whilemanagement believes that the discussion and analysis in this report is adequatefor a fair presentation of the information presented, we recommend that youread this discussion and analysis in conjunction with our Annual Report onForm 10-K for the year ended March 31, 2006.

Foryour convenience, we have included, in Note 16 to the Notes to the UnauditedCondensed Consolidated Financial Statements, a Glossary that contains a list of(1) key acronyms commonly used in our industry that are used in thisQuarterly Report and (2) accounting rules and regulations that arealso referred to in this report. These key acronyms and accountingrules and regulations are listed in alphabetical order.

**Recent Developments**

OnSeptember 29, 2005, our Board of Directors approved management’srecommendation to divest our systems business, which includes substantially allof the operating assets and cash flows that were obtained through ouracquisitions of Snap Appliance Inc., and Eurologic Systems Group Limited infiscal 2004, as well as internally developed hardware and software. Inconnection with this action, we classified the systems business as adiscontinued operation in our condensed consolidated financial statements inSeptember 2005, and sold the block-based portion of the systems business in January2006.

OnJuly 6, 2006, our Board of Directors decided to retain the Snap Server portionof the systems business, and management terminated its ongoing efforts to sellthis business.  As a result of thedecision to retain the Snap Server portion of the systems business, wereclassified the financial statements and related disclosures for all periodspresented to reflect the Snap Server portion of our systems business ascontinuing operations in the first quarter of fiscal 2007. In addition, wereorganized our segments in the first quarter of fiscal 2007, adding the SSGsegment to our previous DPS and DSG segments. Our SSG segment primarily provides Snap Server products, including NAShardware and related software.  We sellthese products to VARs and end users through our network of distribution andreseller channels.

**Results of Operations**

**Overview**

Inthe second quarter of fiscal 2007, our revenues decreased 21% as compared tothe second quarter of fiscal 2006 due primarily to slower adoption of our newergeneration of serial products as compared to the declining revenue base of ourparallel products.  In the second quarterof fiscal 2007, IBM and Dell accounted for 29% and 15% of our net revenues,respectively, compared with 26% and 13%, respectively for IBM and Dell in thesecond quarter of fiscal 2006.   Inaddition, Hewlett-Packard accounted for 10% of our net revenues in the secondquarter of fiscal 2006. The improvement in gross margin in the second quarterof fiscal 2007 compared to the second quarter of fiscal 2006 was primarily dueto changes in our product and customer mix, which included obtaining favorablepricing negotiations with certain of our customers. Operating expenses alsodecreased in the second quarter of fiscal 2007 as compared to the secondquarter of fiscal 2006 as a result of cost reductions and restructuringefforts.

Our future revenuegrowth remains largely dependent on the success of our new products addressingserial technologies (for example., SAS, SATA and iSCSI), new OEM design wins,channel growth and our ability to develop new products in other markets.

 

22

----

The followingtable sets forth the items in the UnauditedCondensed Consolidated Statements of Operations as a percentage of netrevenues (references to notes in the footnotes to this table are to the Notesto Unaudited Condensed Consolidated Financial Statements appearing in thisreport):
| ** **                                                            | ** ** | **Three-Month Period Ended (1)** | ** ** | **Six-Month Period Ended (2)** | ** ** |
|-----------------------------------------------------------------------|------------|-------------------------------------------------|------------|-----------------------------------------------|------------|
| ** **                                                            | ** ** | **September 30,  2006**                    | ** ** | **September 30,  2005**                  | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** |
| Net revenues                                                          |       | 100                                             | %          | 100                                           | %          | 100 | % | 100 | % |
| Cost of revenues                                                      |       | 64                                              |       | 67                                            |       | 66 |   | 69 |   |
| Gross margin                                                          |       | 36                                              |       | 33                                            |       | 34 |   | 31 |   |
| Operating  expenses:                                                  |       |                                            |       |                                          |       |   |   |   |   |
| Research and development                                              |       | 18                                              |       | 19                                            |       | 21 |   | 21 |   |
| Selling, marketing and administrative                                 |       | 21                                              |       | 21                                            |       | 22 |   | 21 |   |
| Amortization of acquisition-related intangible  assets                |       | 2                                               |       | 3                                             |       | 2 |   | 3 |   |
| Restructuring charges                                                 |       | 2                                               |       | 1                                             |       | 3 |   | 0 |   |
| Goodwill impairment                                                   |       | —                                          |       | 98                                            |       | — |   | 52 |   |
| Other charges                                                         |       | —                                          |       | —                                        |       | 10 |   | — |   |
| Total operating expenses                                              |       | 43                                              |       | 142                                           |       | 58 |   | 97 |   |
| Loss from  continuing operations                                      |       | (7                                              | )          | (109                                          | )          | (24 | ) | (66 | ) |
| Interest and  other income                                            |       | 8                                               |       | 5                                             |       | 8 |   | 4 |   |
| Interest expense                                                      |       | (1                                              | )          | (1                                            | )          | (1 | ) | (1 | ) |
| Loss from  continuing operations before income taxes                  |       | (0                                              | )          | (105                                          | )          | (17 | ) | (63 | ) |
| Provision for  (benefit from) income taxes                            |       | (67                                             | )          | 3                                             |       | (34 | ) | 2 |   |
| Income (loss)  from continuing operations                             |       | 67                                              |       | (108                                          | )          | 17 |   | (65 | ) |
| Discontinued  operations, net of taxes (Note 4)                       |       |                                            |       |                                          |       |   |   |   |   |
| Income (loss)  from discontinued operations, net of taxes             |       | (0                                              | )          | 1                                             |       | 0 |   | (12 | ) |
| Income (loss)  from disposal of discontinued operations, net of taxes |       | 3                                               |       | (7                                            | )          | 3 |   | (4 | ) |
| Income (loss)  from discontinued operations                           |       | 3                                               |       | (6                                            | )          | 3 |   | (16 | ) |
| Net income (loss)                                                     |       | 70                                              | %          | (114                                          | )%         | 20 | % | (81 | )% |

----

(1)             Inthe second quarter of fiscal tax 2007, we implemented a restructuring plan andreceived a discrete tax benefit of $46.0 million from the settlement of certaintax disputes with the U.S. and Singapore taxing authorities. In the secondquarter of fiscal 2006, we recorded a goodwill impairment charge of $90.6million.

(2)             Inthe first half of fiscal 2007, we recorded an impairment charge of $13.2million related to the Snap server portion of the systems business, implementedrestructuring plans and received a discrete tax benefit of $46.0 million fromthe settlement of certain tax disputes with the U.S. and Singapore taxingauthorities. In the first half of fiscal 2006, we recorded a goodwillimpairment charge of $90.6 million.

**Net Revenues.**
| ** **                          | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|-------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                          | ** ** | **September 30,**

**2006**                     | ** ** | **September 30,**

**2005**     | ** ** | **Percentage  Change** | ** ** | **September 30,**

**2006** | ** ** | **September 30,**

**2005** | ** ** | **Percentage  Change** | ** ** |
| **Segment Net Revenues:** | ** ** | **(in millions, except percentages)** | ** ** |
| DPS                                 |       | $                                                    | 63.0       |                                 | $          | 73.8 |   | (15 | )% | $ | 119.1 |   | $ | 139.0 |   | (14 | )% |
| DSG                                 |       | 4.5                                                  |       | 11.1                                 |       | (59 | )% | 9.7 |   | 19.9 |   | (51 | )% |
| SSG                                 |       | 6.1                                                  |       | 7.7                                  |       | (21 | )% | 13.8 |   | 17.5 |   | (21 | )% |
| **Total  Net Revenues**             |       | 73.6                                                 |       | 92.6                                 | ** ** | **(21** | **)%** | 142.6 |   | 176.4 | ** ** | **(19** | **)%** |
|                                     |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Revenuesfrom our DPS segment decreased by $10.8 million and $19.9 million in thesecond quarter and first half of fiscal 2007, respectively, as compared to thecorresponding periods of fiscal 2006, reflecting a decline in sales volumes ofour parallel SCSI products primarily sold to our OEM customers, which waspartially offset by increased sales of our serial products. The decline insales volumes of our SCSI products was primarily attributable to the transitionfrom parallel to serial products, in which we have a lower market share, and ashift to lower-priced SATA solutions, in which there is a more competitivemarket.  The DPS segment performance wasalso hindered during the first quarter of fiscal 2007 due to supply issues thatresulted from the transition of our manufacturing operations to a contractmanufacturer. Our contract manufacturer was challenged with material shortagesand systems transitions that impacted their ability to meet deliverycommitments on a consistent basis, which consequently prevented us fromcompleting certain product shipments during the first quarter of fiscal 2007.

 

23

----

Revenuesfrom our DSG segment decreased by $6.6 million and $10.2 million in thesecond quarter and first half of fiscal 2007, respectively, as compared to thecorresponding periods of fiscal 2006 primarily due to the decline in salesvolumes of our digital media products and SCSI-based desktop computerproducts.  The decline in sales volumesof our digital media products was primarily attributable to the decline ofsales of our dual tuner products to a specific customer. We expect revenuesfrom our DSG products to continue to decline as OEMs are incorporating otherconnectivity technologies directly into their products.

Revenuesfrom our SSG segment decreased by $1.6 million and $3.7 million in the secondquarter and first half of fiscal 2007, respectively, as compared to thecorresponding periods of fiscal 2006 primarily as a result of our reduced salesand marketing resources while the Snap Server portion of our systems businesswas available for sale, combined with customer concerns over the future of thisproduct line.
| ** **                        | ** ** | **Three-MonthPeriod Ended** | ** ** | **Six-Month Period Ended** | ** ** |
|-----------------------------------|------------|----------------------------------|------------|--------------------------------------|------------|
| ** **                        | ** ** | **September 30, 2006** | ** ** | **September 30, 2005**     | ** ** | **September 30, 2006** | ** ** | **September 30, 2005** | ** ** |
| **Geographical  Revenues:**       | ** ** | ** **                       | ** ** | ** **                           | ** ** | ** ** | ** ** | ** ** | ** ** |
| North America                     |       | 44                               | %          | 38                                   | %          | 45 | % | 40 | % |
| Europe                            |       | 24                               | %          | 29                                   | %          | 24 | % | 29 | % |
| Pacific Rim                       |       | 32                               | %          | 33                                   | %          | 31 | % | 31 | % |
|  Total Geographical Revenues |       | 100                              | %          | 100                                  | %          | 100 | % | 100 | % |

 

Our overall international revenues declined as a percentageof our total revenues in the second quarter and first half of fiscal2007 as compared to the corresponding periods of fiscal 2006. This wasprimarily a result of a customer that ceased purchasing from us during fiscal2006, which contributed to the European revenues of $5.7 million and $10.7million during the second quarter and first half of fiscal 2006, respectively.

Asmall number of our customers account for a substantial portion of our netrevenues, and we expect that a limited number of customers will continue torepresent a substantial portion of our net revenues for the foreseeable future.In the second quarter of fiscal 2007, IBM and Dell accounted for 29% and 15% ofour total net revenues, respectively. In the second quarter of fiscal 2006,IBM, Dell and Hewlett-Packard accounted for 26%,13% and 10% of our total netrevenues, respectively. In the first half of fiscal 2007, IBM and Dellaccounted for 32% and 16% of our total net revenues, respectively. In the firsthalf of fiscal 2006, IBM and Dell accounted for 24% and 14% of our net totalrevenues, respectively.

**Gross Margin.**
| ** **   | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|--------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **   | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **   | ** ** | **(in millions, except percentages)** | ** ** | ** **                           | ** ** |
| Gross Profit |       | $                                                    | 26.5       |                                 | $          | 30.1 |   | (12 | )% | $ | 48.8 |   | $ | 54.2 |   | (10 | )% |
| Gross Margin |       | 36                                                   | %          | 33                                   | %          |   |   | 34 | % | 31 | % |   |   |
|              |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Theimprovement in gross margin in the second quarter and first half of fiscal 2007compared to the corresponding periods of fiscal 2006 was primarily a result ofan excess inventory adjustment of $1.9 million recorded in the first half offiscal 2006 related to the transition of our products to comply with theEuropean RoHS Directive. Exclusive of this adjustment, and even with thedecline in revenues of 21% and 19% for the second quarter and first half offiscal 2007 compared with the corresponding periods of fiscal 2006, we wereable to slightly improve our gross margins due to changes to our product and customermix, which included a shift in revenue between our OEM and channel customers,and benefits received from a renegotiated supply contract that was entered intoduring the third quarter of fiscal 2006. Cost of sales for the second quarterand first half of fiscal 2007 included $0.1 million and $0.3 million,respectively, of charges related to the adoption of SFAS 123(R), while thecorresponding periods of fiscal 2006 had no such charges. Our gross marginswill be significantly impacted in the future by the mix of OEM and channelrevenue as well as product mix.

**Research and Development Expense.**
| ** **                | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|---------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                | ** ** | **(in millions, except percentages)** | ** ** |
| Research and  Development |       | $                                                    | 13.6       |                                 | $          | 17.9 |   | (24 | )% | $ | 30.9 |   | $ | 36.2 |   | (15 | )% |
|                           |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

24

----

The decrease in research and development expense inthe second quarter and first half of fiscal 2007 as compared to thecorresponding periods of fiscal 2006 was primarily due to reduced headcount asa result of restructuring programs implemented in fiscal 2006 and the firsthalf of fiscal 2007, and decreased infrastructure spending.  Research and Development expense for thesecond quarter and first half of fiscal 2007 included $0.9 million and$2.1 million, respectively, of charges related to the adoption of SFAS123(R), while the corresponding periods of fiscal 2006 had no such charges.

**Selling, Marketing and Administrative Expense.**
| ** **                             | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                             | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                             | ** ** | **(in millions, except percentages)** | ** ** |
| Selling,  Marketing and Administrative |       | $                                                    | 15.7       |                                 | $          | 19.2 |   | (18 | )% | $ | 31.1 |   | $ | 37.7 |   | (18 | )% |
|                                        |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Thedecrease in selling, marketing and administrative expense in the second quarterand first half of fiscal 2007 as compared to the corresponding period of fiscal2006 was primarily a result of reductions of our workforce and infrastructurespending as a result of the restructuring plans we implemented in fiscal 2006and $1.2 million of compensation expense recorded in the first quarter offiscal 2006 for retirement costs to our former chief executive officer.  Selling, marketing and administrative expensefor the second quarter and first half of fiscal 2007 included $1.0 million and$2.1 million, respectively, of charges related to the adoption of SFAS 123(R),while the corresponding periods of fiscal 2006 had no such charges. We expectselling, marketing and administrative expense to increase in the future as weinvest additional resources in our SSG business as well as increased spendingin marketing programs to increase awareness of our product offerings.

**Amortization of Acquisition-Related Intangible Assets.**
| ** **                                             | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|--------------------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                             | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                                             | ** ** | **(in millions, except percentages)** | ** ** |
| Amortization of  Acquisition-Related Intangible Assets |       | $                                                    | 1.5        |                                 | $          | 2.8 |   | (48 | )% | $ | 3.1 |   | $ | 5.9 |   | (48 | )% |
|                                                        |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Acquisition-relatedintangible assets include patents, core and existing technologies, customerrelationships and trade names. We amortize the acquisition-related intangibleassets over periods which reflect the pattern in which the economic benefits ofthe assets are expected to be realized, primarily using the straight-linemethod over their estimated useful lives, which ranged from three months tofive years.

Thedecrease in amortization of acquisition-related intangible assets in the secondquarter and first half of fiscal 2007 compared to the corresponding periods offiscal 2006 was primarily due to lower amortization related to Snap Applianceintangible assets which were written down through “Impairment of intangibleassets and other charges” recorded in March 2006 and June 2006, intangibleassets that became fully amortized in August 2005 associated with ouracquisition of Platys Communications, Inc. and certain intangible assets thatbecame fully amortized in fiscal 2006 associated with our acquisition of ICPvortex Computersysteme GmbH.

**Restructuring Charges.**
| ** **             | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **             | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **             | ** ** | **(in millions, except percentages)** | ** ** |
| Restructuring  Charges |       | $                                                    | 1.1        |                                 | $          | 0.5 |   | 127 | % | $ | 4.1 |   | $ | 0.5 |   | 691 | % |
|                        |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

All expenses, including adjustments, associated withour restructuring plans are included in “Restructuring charges” in theCondensed Consolidated Statements of Operations and are not allocated tosegments but rather managed at the corporate level.  For a complete discussion of allrestructuring actions that were implemented prior to fiscal 2007, please referto the Notes to Consolidated Financial Statements included in our Annual Reporton Form 10-K for the year ended March 31, 2006.

 

25

----

In the first and second quarters of fiscal 2007,management approved and initiated plans to restructure our operations bysimplifying our infrastructure.  Thefirst quarter of fiscal 2007 restructuring plan eliminated certain duplicativeresources in all functions of the organization worldwide, due to consolidatingcertain processes and vacating redundant facilities in order to reduce our coststructure, resulting in a restructuring charge of $3.0 million. The secondquarter of fiscal 2007 restructuring plan vacated another redundant facilityand involuntarily terminated employees primarily related to research anddevelopment activities, resulting in a restructuring charge of $0.9 million.

As a result of our first quarter of fiscal 2007restructuring plan, we expect to reduce our annual infrastructure spending byapproximately $9 million beginning in the second quarter of fiscal 2007, ofwhich 9%, 58% and 33% will be reflected as a reduction in cost of revenues,research and development and selling, marketing and administrative expense,respectively. As a result of our second quarter of fiscal 2007 restructuringplan, we expect to reduce our annual infrastructure spending by approximately$3 million beginning in the third quarter of fiscal 2007, of which 3%, 74% and23% will be reflected as a reduction in cost of revenues, research anddevelopment and selling, marketing and administrative expense, respectively.

We also recorded provision adjustments of $0.2 millionin the second quarter and first half of fiscal 2007 related primarily toadditional lease costs based on the estimated loss on facilities that wesubleased and asset impairments associated with the identification ofduplicative assets. This was partially offset by severance and benefits asactual costs were lower than anticipated. These provision adjustments pertainedto the restructuring plans that we implemented in the first quarter of fiscal2007, and restructuring plans that we implemented in fiscal 2006, fiscal 2003,fiscal 2002 and fiscal 2001.

**Goodwill Impairment.**
| ** **           | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|----------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **           | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **           | ** ** | **(in millions, except percentages)** | ** ** |
| Goodwill  Impairment |       | $                                                    | —     |                                 | $          | 90.6 |   | (100 | )% | $ | — |   | $ | 90.6 |   | (100 | )% |
|                      |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Goodwill is not amortized, but instead is reviewed annuallyand whenever events or circumstances occur which indicate that goodwill mightbe impaired. In connection with the reorganization of our segments in fiscal2006, in which the organization managed our segments at the product level asopposed to a set of customer-focused products, an assessment of therecoverability of goodwill was performed. Impairment of goodwill is tested at our reporting unit level, which isour 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 themarket approach. In performing our analysis, we used the best informationavailable under the circumstances, including reasonable and supportableassumptions and projections. If the carrying amount of the segment exceeds itsimplied fair value, goodwill is considered impaired and a second step isperformed to measure the amount of impairment loss, if any. As a result of thisreview, we wrote-off our entire balance of goodwill of $90.6 million in thesecond quarter of fiscal 2006.  Factorsthat led to this conclusion included, but were not limited to, industrytechnology changes experienced in the first half of fiscal 2006 such as theshift from parallel to serial technology and the migration of corefunctionality to server chipsets; required increased investments thateventually led us to sell the IBM i/p Series RAID Business in the secondquarter of fiscal 2006 and the decision to sell the systems business; continuedlosses associated with the sales of systems products to IBM; and general marketconditions.

**Other Charges.**
| ** **    | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|---------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **    | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **    | ** ** | **(in millions, except percentages)** | ** ** |
| Other Charges |       | $                                                    | —     |                                 | $          | — |   | n/a |   | $ | 13.9 |   | $ | — |   | 100 | % |
|               |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Othercharges consisted of asset impairment charges of $13.2 million in the firsthalf of fiscal 2007, related to certain acquisition-related intangible assets.The first half of fiscal 2007 also included charges of $0.7 million of legaland consulting fees incurred in connection with our efforts that had beenundertaken to sell the Snap Systems portion of our business.

Weregularly perform reviews to determine if facts or circumstances are present,either internal or external, which would indicate that the carrying values ofour 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 andits carrying value. The estimate of fair value of the assets is based ondiscounting estimated future cash flows using a discount rate commensurate withthe risks inherent in our current business model. The estimation of theimpairment involves numerous assumptions which require judgment by us,including, but not limited to, future use of the assets for our operationsversus sale or disposal of the assets and future selling prices for ourproducts.

 

26

----

InJuly 2006, and effective for the end of the first quarter of fiscal 2007, ourBoard of Directors decided to retain the Snap Server portion of the systemsbusiness as management concluded that the potential value from retaining theoperations outweighed the offers received from prospective buyers for thebusiness.  As a result, managementterminated its ongoing efforts to sell this business and reclassified thefinancial statements and related disclosures for all periods presented toreflect the Snap Server portion of our systems business as continuingoperations.

Wehad classified the entire systems business as a discontinued operation inSeptember 2005 and sold the block-based portion of the systems business in January2006.  In the fourth quarter of fiscal2006, we recorded an impairment charge of $10.0 million on the long-livedassets held for sale to adjust the carrying value of these assets to fairvalue, which was aligned to the offers being negotiated.   With the decision at the end of the firstquarter of fiscal 2007 to retain and operate the Snap Server portion of thesystems business, we performed an impairment analysis of this business thatindicated that the carrying amount of the long-lived assets exceeded theirestimated fair value. This was due in part to the limited cash flows of thebusiness and a number of uncertainties, which included the significant researchand development expenditures necessary to grow the revenue of the Snap Serverportion of the systems business and the significant uncertainties associatedwith achieving such growth in revenue. This resulted in an impairment charge of$13.2 million, which was recorded in “Other charges” in the CondensedConsolidated Statements of Operations.

**Interest and Other Income.**
| ** **                           | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|--------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                           | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                           | ** ** | **(in millions, except percentages)** | ** ** |
| **Interest  and Other Income:**      |       |                                                 |       |                                 |       |   |   |   |   |   |   |   |   |
| Interest Income                      |       | $                                                    | 5.8        |                                 | $          | 3.9 |   | 46 | % | $ | 11.5 |   | $ | 7.5 |   | 53 | % |
| Loss on  Redemption of Debt          |       | —                                               |       | (0.0                                 | )          | 100 | % | — |   | (0.1 | ) | 100 | % |
| Transaction  Gains (Losses)          |       | (0.1                                                 | )          | (0.1                                 | )          | 29 | % | 0.1 |   | (0.4 | ) | 135 | % |
| Other                                |       | 0.1                                                  |       | 0.7                                  |       | (91 | )% | 0.1 |   | 1.1 |   | (92 | )% |
| **Total  Interest and Other Income** |       | 5.8                                                  |       | 4.5                                  | ** ** | **29** | **%** | 11.7 |   | 8.1 | ** ** | **44** | **%** |
|                                      |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interestand other income is primarily attributable to interest income earned on ourcash, cash equivalents and marketable securities, fluctuations in foreigncurrency gains or losses, realized gains and losses on marketable securities,sublease income received from third parties and loss from the repurchase of our3% Convertible Subordinated Notes due 2007,or 3% Notes. The increase in interest and other income in the secondquarter and first half of fiscal 2007 as compared to the corresponding periodsof fiscal 2006 was primarily due to higher interest rates, which resulted inadditional income earned on our cash, cash equivalents and marketablesecurities.

**Interest Expense.**
| ** **       | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **       | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **       | ** ** | **(in millions, except percentages)** | ** ** |
| Interest Expense |       | $                                                    | (0.9       | )                                    | $          | (0.9 | ) | 2 | % | $ | (1.8 | ) | $ | (1.8 | ) | (4 | )% |
|                  |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

Interest expense is primarily associated with our 3⁄4% Convertible Senior Notes due 2023, orthe 3⁄4% Notes, and 3% Notes, issued inDecember 2003 and March 2002, respectively. Interest expense remainedrelatively flat for the second quarter and first half of fiscal 2007 comparedto the corresponding periods of fiscal 2006.

**Income Taxes.**
| ** **                                 | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|--------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                 | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                                 | ** ** | **(in millions, except percentages)** | ** ** |
| Provision for  (Benefit from) Income Taxes |       | $                                                    | (49.1      | )                                    | $          | 2.7 |   | (1937 | )% | $ | (48.2 | ) | $ | 3.5 |   | (1470 | )% |
|                                            |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

27

----

Income tax provisions for interim periods are based onour estimated annual income tax rate. The estimated annual tax for fiscal 2007includes foreign taxes related to our foreign subsidiaries, certain stateminimum taxes, interest accrued on prior years’ tax disputes and the taxallocation between our continuing and discontinued operations. This resulted ina tax benefit of $3.1 million for the second quarter of fiscal 2007. Inaddition, we settled certain tax disputes with the U.S. and Singapore taxingauthorities, including the resolution of our fiscal 1997 U.S. Tax CourtLitigation, which resulted in a discrete tax benefit of $46.0 million that wasrecorded in the second quarter of fiscal 2007. The estimated annual tax forfiscal 2006 consists of foreign taxes related to our foreign subsidiaries,certain state minimum taxes and interest accrued on prior years’ tax disputes.A portion of those disputes was resolved in fiscal 2007. We currently have afull valuation allowance on our net U.S. deferred tax assets. We are in ongoingnegotiations with the U.S. and Singapore taxing authorities with regard to ourvarious tax disputes. Our tax rate for the period in which a settlement isreached is impacted if the settlement materially differs from the amountspreviously accrued.

Wewill be migrating certain foreign operations from Singapore to the Republic ofIreland and the Cayman Islands during the second half of fiscal 2007. There are inherent uncertainties associated with the tax implications of thesemigrations in our foreign tax jurisdictions.  These uncertainties mayresult in a requirement to record additional tax reserves, and the ultimateoutcome of these potential additional reserves may have an adverse affect onour future cash flows and financial results.

**Discontinued Operations.**
| ** **                                  | ** ** | **Three-Month Period Ended**               | ** ** | **Six-Month Period Ended** | ** ** |
|---------------------------------------------|------------|------------------------------------------------------|------------|--------------------------------------|------------|
| ** **                                  | ** ** | **September 30,  2006**                         | ** ** | **September 30,  2005**         | ** ** | **Percentage  Change** | ** ** | **September 30,  2006** | ** ** | **September 30,  2005** | ** ** | **Percentage  Change** | ** ** |
| ** **                                  | ** ** | **(in millions, except percentages)** | ** ** |
| Income (Loss)  from Discontinued Operations |       | $                                                    | 2.3        |                                 | $          | (5.9 | ) | 139 | % | $ | 3.9 |   | $ | (27.9 | ) | 114 | % |
|                                             |            |                                                      |            |                                      |            |  |  |  |  |  |  |  |  |  |  |  |  |

 

The change in discontinued operations in the secondquarter and first half of fiscal 2007 as compared to the corresponding periodsof fiscal 2006 was primarily driven by reduced operating expenses due to thedivestiture of the IBM i/p Series RAID Business on September 30, 2005 and thedivestiture of the OEM block-based systems business on January 31, 2006.  The contribution from discontinued operationsin the second quarter and first half of fiscal 2007 is a combination of someresidual royalty revenue related to the sale of the IBM i/p Series RAIDBusiness and the contribution margin from one customer that remained with usafter the divestiture of the OEM block-based systems business. We anticipatethat we will continue to receive a contribution margin from the one customerthrough the third quarter of fiscal 2007.

**Liquidity andCapital Resources**

**Key Components of Cash Flows**

Cashused for operating activities of continuing operations was $9.7 million inthe first half of fiscal 2007 as compared to $14.2 million in the firsthalf of fiscal 2006. Cash used in the first half of fiscal 2007 was primarilythe result of income from continuing operations of $23.9 million, whichincluded a non-cash gain of $46.0 million from the release of tax reserves dueto the settlement of certain tax disputes with the U.S. and Singapore taxingauthorities. Other items contributing to the improvement in cash used foroperating activities was the offset of the non-cash effect of an impairmentcharge of $13.2 million related to the Snap Server intangible assets, the SFAS123(R) expense of $4.6 million, and depreciation and amortization of intangibleassets and property and equipment of $9.3 million. Cash used in the first halfof fiscal 2006 resulted primarily from our loss from continuing operations of$113.9 million, which was partially offset by the benefit of non-cash itemsincluded in operating results, which consisted of depreciation and amortizationof intangible assets and property and equipment of $14.4 million alongwith the impairment of goodwill of $90.6 million. Additional factors includechanges to working capital assets and liabilities, which had a decrease of $8.2and $3.6 million in inventory and accounts payable, respectively, in the firsthalf of fiscal 2007 as the result of the cessation of manufacturing operationsversus $5.7 million in the first half of fiscal 2006 as a result of otherliabilities increasing by $11.6 million.

Cashused for investing activities of continuing operations was $43.0 millionin the first half of fiscal 2007, which was primarily due to net purchases, netof sales and maturities, of restricted marketable securities and marketablesecurities of $39.6 million and purchases of property and equipment fromcontinuing operations of $1.8 million. Cash used for investing activities ofcontinuing operations was $328.3 million in the first half of fiscal 2006,which was primarily due to net purchases, net of sales and maturities, ofrestricted marketable securities and marketable securities of $325.6 millionand purchases of property and equipment of $5.4 million.

Cashprovided by financing activities of $4.3 million in the first half of fiscal2007 was driven by the issuance of common stock in connection with purchasesmade under our employee stock purchase plan and stock option exercises. Cashused for financing activities of $20.4 million in the first half of fiscal2006 was primarily driven by the repurchase of $23.2 million in aggregateprincipal amount of our 3% Notes for $23.0 million.

 

28

----

**Liquidity.**  AtSeptember 30, 2006, we had $555.5 million in cash, cash equivalents andmarketable securities, of which approximately $93.7 million was held byour Singapore subsidiary. In the fourth quarter of fiscal 2005, we repatriated$360.6 million of undistributed earnings from Singapore to the UnitedStates and incurred a tax liability of $17.6 million. The repatriatedamounts will be used to fund a qualified Domestic Reinvestment Plan, asrequired by the American Jobs Creation Act of 2004.  If we do not spend the repatriated funds inaccordance with our reinvestment plan, we may incur additional taxliabilities.  We have not provided for U.S.deferred income taxes or foreign withholding taxes on the remaining undistributedearnings since these earnings totaling approximately $257.2 million areintended to be reinvested internationally indefinitely. Although we do not haveany current plans to repatriate the remaining undistributed earnings from ourSingapore subsidiary to our United States parent company, if we were to do so,additional income taxes at the combined United States Federal and statestatutory rate of approximately 40% could be incurred from the repatriation.

At September 30, 2006, we had $235.6 million ofaggregate principal amount in convertible notes outstanding, consisting of$10.6 million in aggregate principal amount of our 3% Notes that are due inMarch 2007 and $225.0 million in aggregate principal amount of our 3⁄4%Notes that are due in December 2023.

We are required to maintain restricted cash orinvestments to serve as collateral for the first ten scheduled interestpayments on our 3⁄4% Notes.  As ofSeptember 30, 2006, we had $4.0 million of restricted cash and restrictedmarketable securities, consisting of United States government securities, ofwhich $1.7 million was classified as short-term and $2.3 million waslong-term.

Wehave been, or are, subject to IRS audits for our fiscal years 1994 through2003. The fiscal 1994 through fiscal 1996 cycle and fiscal 1997 cycle, whichare docketed in the United States Tax Court, were resolved in December 2001 andSeptember 2006, respectively. The outcome of the fiscal 1994 through fiscal1996 cycle did not have a material adverse effect on our financial position orresults of operations, as sufficient tax provisions had been made. The outcomeof the fiscal 1997 cycle resulted in the release of tax reserves in September2006. The final Tax Court stipulations will be filed when the subsequent auditcycles are completed. Tax credits that were generated but not used insubsequent years may be carried back to the respective fiscal 1994 through 1996and fiscal 1997 audit cycles. In addition, in fiscal 2005, we resolved allissues for fiscal 1998 through fiscal 2001 audit cycles, other than the taxcredits that were generated but not used in subsequent years that may becarried back. The IRS is currently auditing our Federal income tax returns forthe fiscal 2002 and 2003 audit cycle. We believe that we have providedsufficient tax provisions for these years and the ultimate outcome of the IRSaudits will not have a material adverse impact on our financial position orresults of operations in future periods. However, we cannot predict withcertainty how these matters will be resolved and whether we will be required tomake additional tax payments.

As of September 30, 2006, we did not have any materialchanges to our contractual obligations that were disclosed in the Liquiditysection of our Form 10-K for the fiscal year ended March 31, 2006.

We believe that liquidity provided by our existingworking capital, together with expected cash flows from operations and availablesources of equity and equipment financing, will be sufficient to support ouroperations through at least the next twelve months. However, should prevailingeconomic conditions and/or financial, business and other factors beyond ourcontrol adversely affect our estimates of our future cash requirements, wewould be required to fund our cash requirements by alternative financing. Therecan be no assurance that additional financing, if needed, would be available onterms acceptable to us or at all.

**RecentAccounting Pronouncements**

InJune 2006, the FASB issued FIN No. 48, which clarifies the accounting foruncertainty in income taxes recognized in a company’s financial statements inaccordance with SFAS No. 109.  FIN No. 48prescribes a recognition threshold and measurement attribute for the financialstatement recognition and measurement of a tax position taken or expected to betaken in a tax return. This interpretation also provides guidance onderecognition, classification, interest and penalties, accounting in interimperiods, disclosure, and transition. FIN No. 48 is effective beginning with ourfiscal year 2008. We are currently assessing the impact, if any, of FIN No. 48on our financial position and results of operations.

In September 2006, the SEC issuedSAB 108 in order to eliminate the diversity of practice surrounding how publiccompanies quantify financial statement misstatements. Traditionally, there havebeen two widely-recognized methods for quantifying the effects of financialstatement misstatements:  the “roll-over”method and the “iron curtain” method. The “roll-over” method focuses primarily on the impact of a misstatementon the income statement, including the reversing effect of prior periodmisstatements; but its use can lead to the accumulation of misstatements in thebalance sheet.  The “iron-curtain”method, on the other hand, focuses primarily on the effect of correcting theperiod-end balance sheet with less emphasis on the reversing effects of priorperiod errors on the income statement. We currently use the “roll-over” method for quantifying identifiedfinancial statement misstatements.  InSAB 108, the SEC staff established an approach that requires quantification offinancial statement misstatements based on the effects of the misstatements oneach of our financial statements and the related financial statementdisclosures.  This model is commonlyreferred to as a “dual approach” because it requires quantification of errorsunder both the “iron curtain” and the “roll-over” methods. SAB 108 permitsexisting public companies to initially apply its provisions either by (i)restating prior financial statements as if the “dual approach” had always beenused or (ii) recording the cumulative effect of initially applying the “dualapproach” as adjustments to the carrying values of assets and liabilities as ofApril 1, 2006 with an offsetting adjustment recorded to the opening balance ofretained earnings.  Use of the “cumulativeeffect” transition method 

 

29

----

requires detailed disclosure ofthe nature and amount of each individual error being corrected through thecumulative adjustment and how and when it arose. We will initially apply theprovisions of SAB 108 using the “cumulative effect” transition method inconnection with the preparation of our annual financial statements for the yearending March 31, 2007. We are currently evaluating the impact of SAB 108on 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 regardingthe methods used for measuring fair value, and expands disclosures about fairvalue measurements. SFAS No. 157 is effective for financial statementsissued for fiscal years beginning after November 15, 2007, and interimperiods within those fiscal years. We are currently evaluating the impact ofSFAS No. 157 on our results of operations and financial position.

**CriticalAccounting Policies**

For a completedescription of what we believe to be the critical accounting policies thataffect our more significant judgments and estimates used in the preparation ofour condensed consolidated financial statements, refer to our Annual Report onForm 10-K for the year ended March 31, 2006. The following was added as a criticalaccounting policy during our first fiscal quarter ended June 30, 2006.

**Stock-based compensation:    **In fiscal 2007, we adopted SFAS No. 123(R)using the modified prospective method and began accounting for our stock-basedcompensation using a fair-valued based recognition method.  Under the provisions of SFAS No. 123(R),stock-based compensation cost is estimated at the grant date based on thefair-value of the award and is recognized as expense ratably over the requisiteservice period of the award.  Determiningthe appropriate fair-value model and calculating the fair value of stock-basedawards at the grant date requires considerable judgment, including estimatingstock price volatility, expected option life and forfeiture rates.  We develop our estimates based on historicaldata and market information which can change significantly over time.  A small change in the estimates used can havea relatively large change in the estimated valuation.

Weuse the Black-Scholes option valuation model to value stock awards.  We estimate stock price volatility based onan average of its historical volatility and the implied volatility derived fromtraded options on our stock.  Estimatedoption life and forfeiture rate assumptions are derived from historical data.  For stock-based compensation awards withgraded vesting that were granted after fiscal 2006, we recognize compensationexpense using the straight-line amortization method.

Therehave been no other changes in our critical accounting policies since March 31,2006.

**Dispositions**

**IBM i/p Series RAID:    **OnJune 29, 2004, we completed the acquisition of the IBM i/p Series RAIDBusiness.

OnSeptember 30, 2005, we entered into a series of arrangements with IBM pursuantto 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, IBMpurchased 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 $0.3million for lease obligations. Under the terms of the agreements, we grantedIBM a nonexclusive license to certain intellectual property and sold to IBMsubstantially all of the assets dedicated to the engineering and manufacturingof RAID controllers and connectivity products for the IBM i/p Series RAIDBusiness. Under the terms of the nonexclusive license, IBM will pay royaltiesto us for the sale of our board-level products on a quarterly basis throughMarch 31, 2007, which will be recognized as contingent consideration indiscontinued operations as earned. In fiscal 2006, we received royalties, netof taxes of $5.6 million, which we recorded in “Income (loss) from disposal ofdiscontinued operations, net of taxes,” in our Consolidated Statements ofOperations.  Additional royalties, net oftaxes of $2.4 million and $3.7 million, were recorded in the second quarter andfirst half of fiscal 2007, respectively. Through September 30, 2006, we had recognized a cumulative gain of $1.4million on the disposal of the IBM i/p Series RAID Business.

**Systems Business:**    OnSeptember 29, 2005, our Board of Directors approved management’s recommendationto divest our systems business, including substantially all of the operatingassets and cash flows that were obtained through the Snap Appliance acquisitionin July 2004. Accordingly, we had classified the systems business as adiscontinued operation in our consolidated financial statements for thethree-year period ended March 31, 2006 and began pursuing a sale of the systemsbusiness.

OnJanuary 31, 2006, we sold the block-based portion of our systems business toSanmina-SCI Corporation and its wholly owned subsidiary, Sanmina-SCI USA, Inc.,for $14.5 million, of which $5.0 million will be received over thetwo years following the transaction. In addition, Sanmina-SCI USA agreed to payus contingent consideration of up to an additional $12.0 million ifcertain revenue levels are achieved over a three-year period. We recorded again of $12.1 million on the disposal of the OEM block-based systemsbusiness in the fourth quarter of fiscal 2006.

30

----

 

We received offers from prospective buyers for theSnap Server portion of our systems business; however, management concluded thatthe potential value from retaining the operations outweighed the offersreceived for the business.  As a result,on July 6, 2006, and effective for the end of the first quarter of fiscal 2007,our Board of Directors decided to retain the Snap Server portion of the systemsbusiness, and management terminated its ongoing efforts to sell this business.As a result, we reclassified the financial statements and related disclosuresfor all periods presented to reflect the Snap Server portion of our systemsbusiness as continuing operations. In addition, we recorded asset impairmentcharges of $13.2 million related to certain acquisition-related intangibleassets and $0.7 million of legal and consulting fees incurred in connectionwith our efforts that had been undertaken to sell the Snap Server portion ofour systems business, which was recorded in “Other charges” in the CondensedConsolidated Statements of Operations in the first half of fiscal 2007.

**Item 3.Quantitative and Qualitative Disclosures About Market Risk**

For financial market risksrelated to changes in interest rates, equity price and foreign currencyexchange rates, reference is made to Item 7A “Quantitative and QualitativeDisclosures About Market Risk” contained in Part II of our Annual Reporton Form 10-K for the year ended March 31, 2006.  Our exposure to market risk has not changedmaterially since March 31, 2006.

31

----

** **

**Item 4. Controlsand Procedures**

**Evaluationof Disclosure Controls and Procedures**

Underthe supervision and with the participation of our management, including ourChief Executive Officer (CEO) and our Chief Financial Officer (CFO), weconducted an evaluation of our disclosure controls and procedures (as definedin 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 Quarterly Reporton Form 10-Q. Based upon that evaluation, our CEO and our CFO haveconcluded that the design and operation of our disclosure controls andprocedures were effective to ensure that information required to be disclosedby us in reports that we file or submit under the Exchange Act (i) is recorded,processed, summarized and reported within the time periods specified inSecurities and Exchange Commission rules and forms and (ii) is accumulated andcommunicated to our management, including our CEO and CFO, as appropriate to allowtimely decisions regarding required disclosure.

**Changesin Internal Control Over Financial Reporting**

Therehas been no change in our internal control over financial reporting thatoccurred during the period covered by this Quarterly Report on Form 10-Q thathas materially affected, or is reasonably likely to materially affect, ourinternal control over financial reporting.

**InherentLimitations on Effectiveness of Controls**

Ourmanagement, including the CEO and CFO, does not expect that our disclosure controlsand procedures or our internal control over financial reporting will prevent ordetect all error and all fraud. A control system, no matter how well designedand operated, can provide only reasonable, not absolute, assurance that thecontrol system’s objectives will be met. The design of a control system mustreflect the fact that there are resource constraints, and the benefits ofcontrols must be considered relative to their costs. Further, because of theinherent limitations in all control systems, no evaluation of controls canprovide absolute assurance that misstatements due to error or fraud will notoccur or that all control issues and instances of fraud, if any, within thecompany have been detected. These inherent limitations include the realitiesthat judgments in decision-making can be faulty and that breakdowns can occurbecause of simple error or mistake. Controls can also be circumvented by theindividual acts of some persons, by collusion of two or more people, or bymanagement override of the controls. The design of any system of controls isbased in part on certain assumptions about the likelihood of future events, andthere can be no assurance that any design will succeed in achieving its statedgoals under all potential future conditions. Projections of any evaluation ofcontrols effectiveness to future periods are subject to risks. Over time,controls may become inadequate because of changes in conditions ordeterioration in the degree of compliance with policies or procedures.

 

32

----

 

**PART II. OTHERINFORMATION**

**Item 1. Legal Proceedings**

We have been, or are,subject to IRS audits for our fiscal years 1994 through 2003. The fiscal 1994through fiscal 1996 cycle and fiscal 1997 cycle, which are docketed in theUnited States Tax Court, were resolved in December 2001 and September 2006,respectively. The outcome of the fiscal 1994 through fiscal 1996 cycle did nothave a material adverse effect on our financial position or results ofoperations, as sufficient tax provisions had been made. The outcome of thefiscal 1997 cycle resulted in the release of tax reserves in September 2006.The final Tax Court stipulations will be filed when the subsequent audit cyclesare completed. Tax credits that were generated but not used in subsequent yearsmay be carried back to the respective fiscal 1994 through 1996 and fiscal 1997audit cycles. In addition, in fiscal 2005, we resolved all issues for fiscal1998 through fiscal 2001 audit cycles, other than the tax credits that weregenerated but not used in subsequent years that may be carried back. The IRS iscurrently auditing our Federal income tax returns for the fiscal 2002 and 2003audit cycle. We believe that we have provided sufficient tax provisions forthese years and the ultimate outcome of the IRS audits will not have a materialadverse impact on our financial position or results of operations in futureperiods. However, we cannot predict with certainty how these matters will beresolved and whether we will be required to make additional tax payments. 

We are a party to other litigation matters and claims,including those related to intellectual property, which are normal in thecourse of its operations, and while the results of such litigation matters andclaims cannot be predicted with certainty, we believe that the final outcome ofsuch matters will not have a material adverse impact on our financial positionor results of operations. However, because of the nature and inherentuncertainties of litigation, should the outcome of these actions be unfavorable,our business, financial condition, results of operations and cash flows couldbe materially and adversely affected.

 

In connection with ouracquisitions of Snap Appliance Inc., Eurologic Systems Group Limited, orEurologic, Elipsan Limited, or Elipsan, and Platys Communications, Inc., orPlatys, portions of the purchase price and other future payments totaling $6.7million, $3.8 million, $2.0 million and $15.0 million, respectively, were heldback, or collectively the Holdbacks, for unknown liabilities that may haveexisted as of the acquisition dates.  Asof September 30, 2006, we have asserted claims against the Snap Appliance Inc.and Eurologic Holdbacks totaling $3.0 million and $1.5 million, respectively.  The remainder of the Platys Holdback of $0.7million was paid in the second quarter of fiscal 2007. The Elipsan Holdback of$2.0 million was paid in the second quarter of fiscal 2006.

**Item 1A. RiskFactors**

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

***The impact of ongoing contract negotiations with our large OEMcustomers, industry technology transitions and market acceptance of our newproducts could cause our quarterly revenues to continue to decline.***Wedepend on a small number of large OEM customers for a significant portion ofour revenues, and we are engaged in ongoing contract negotiations concerningproduct specifications and price.  Thesenegotiations may prove to be unfavorable. We are also in the midst of anindustry transition from parallel to serial connectivity, and the revenue wegenerate from sales of our serial products has not grown at a fast enough rateto offset declines in sales of our parallel products and this trend maycontinue in future periods.  In addition,the development of new products may not gain sufficient market acceptance orcontribute significantly to revenue. These factors, individually or in the aggregate, could cause ourquarterly revenues to continue to decline.

***We depend on contract manufacturers and subcontractors, and if theyfail to meet our manufacturing needs, it could delay shipments of our productsand result in the loss of customers.***    Werely on contract manufacturers for manufacturing our products andsubcontractors for the assembly and packaging of the integrated circuitsincluded in our products. On December 23, 2005, we entered into a three-yearcontract manufacturing agreement with Sanmina-SCI, whereby Sanmina-SCI upon theclosing of the transaction on January 9, 2006, assumed manufacturing operationson a majority of our products.  Thetransition of the manufacturing facilities has not gone as well as expected, asSanmina-SCI was challenged with material shortages that impacted their abilityto meet delivery commitments on a consistent basis, which negatively impactedour revenues and operating results in the first quarter of fiscal 2007. IfSanmina-SCI is unwilling or unable to meet our supply needs, we could losecustomers or revenue, which would have an adverse effect on our results.  We have no long-term agreements with ourassembly and packaging subcontractors. We also employ Amkor Technology andAdvanced Semiconductor Engineering for our final assembly and test operationsrelated to our ASIC products. We cannot assure you that these subcontractorswill continue to be able and willing to meet our requirements for thesecomponents or services. Any significant disruption in supplies from or degradationin the quality of components or services supplied by, these contractmanufacturers and subcontractors could delay shipments and result in the lossof customers or revenues, which could have an adverse effect on our financialresults.

***Actions that we have taken andthe actions that we are considering could adversely affect our business andfinancial results in the short-term, and may not have the long-term beneficialresults that we intend.*** Our new management team iscontinuing to perform a thorough analysis of our operations, which it initiatedin the first quarter of fiscal 2006, and have begun implementing a detailedplan to support our corporate strategy. This analysis of our operations includes a review of all aspects of ourbusiness, including our product portfolio, our relationships with strategicpartners and our research and development focus.

The actions that we have taken and the actions that weare considering could adversely affect our business and financial results inthe short-term, may not have the long-term beneficial results that we intendand could result in the following:

• loss of customers;

• loss of employees;

• increased dependency onsuppliers;

• supply issues;

• reduced revenue base;

• impairment of our assets;

• increased operating costs; and

• material restructuring charges.

***Our operating results have fluctuated in the past, and are likely tocontinue to fluctuate, and if our future results are below the expectations ofinvestors or securities analysts, the market price of our common stock wouldlikely decline significantly.****    *Ourquarterly operating results have fluctuated in the past, and are likely to varysignificantly in the future, based on a number of factors related to ourindustry and the markets for our products. Factors that are likely to cause ouroperating results to fluctuate include those discussed in this Risk Factorssection. In the first half of fiscal 2007, our operating results werematerially impacted by an impairment charge of intangible assets for $13.2million.

 

33

----

Ouroperating expenses are largely based on anticipated revenues, and a largeportion of our expenses, including facility costs and salaries, are fixed inthe short term. As a result, lower than anticipated revenues for any reasoncould cause significant variations in our operating results from quarter toquarter.

Dueto 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 ourfinancial results as an indication of our future performance. In the event thatour operating results fall below the expectations of market analysts orinvestors, the market price of our common stock could decline substantially.

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

• Reduced demand for our products;

• Increased price competition for our products;

• Increased risk of excess and obsolete inventories; and

• Higher operating costs as a percentage of revenues.

Demandfor our products would likely be negatively affected if demand in the serverand network storage markets declines. For example, demand in the server marketdeclined slightly in fiscal 2002 and fiscal 2003, which contributed to adecline in our net revenues. It is difficult to predict future server salesgrowth, if any. In addition, other technologies may replace the technologiesused in our existing products and the acceptance of our products using newtechnologies in the market may not be widespread, which could adversely affectour revenues.

***Because our sales are made by means of standard purchase orders ratherthan long-term contracts, if demand for our customers’ products declines or ifour customers do not control their inventories effectively, they may cancel orreschedule shipments previously ordered from us or reduce their levels ofpurchases from us.***    The volume andtiming of orders received during a quarter are difficult to forecast. Ourcustomers generally order based on their forecasts and they frequentlyencounter uncertain and changing demand for their products. If demand fallsbelow such forecasts or if our customers do not control their inventorieseffectively, they may cancel or reschedule shipments previously ordered fromus. Our customers have from time to time in the past canceled or rescheduledshipments previously ordered from us, and we cannot assure you that they willnot do so in the future. In addition, because our sales are made by means ofstandard purchase orders rather than long-term contracts, we cannot assure youthat these customers will continue to purchase quantities of our products atcurrent levels, or at all. Historically, we have set our operating budget basedon forecasts of future revenues because we do not have significant backlog.Because much of our operating budget is relatively fixed in the short-term, ifrevenues do not meet our expectations, then our financial results will beadversely affected.

***We depend on a few key customers and theloss of any of them could significantly reduce our net revenues.***    Historically, a small number of our customers hasaccounted for a significant portion of our net revenues, and we expect that alimited number of customers will continue to represent a substantial portion ofour net revenues for the foreseeable future. In addition, our largest customershave begun accounting for an increasingly greater percentage of our netrevenues, which could magnify the effects if one of these customers elected toreduce or eliminate their purchases from us. For example, in the first half of fiscal 2007, IBM and Dell accounted for32% and 16% of our total net revenues, respectively, whereas in the first halfof fiscal 2006, IBM, and Dell accounted for 24% and 14% of our total netrevenues, respectively. We believe that our major customers continuallyevaluate whether or not to purchase products from alternate or additionalsources. Additionally, customers’ economic and market conditions frequentlychange. Accordingly, we cannot assure you that a major customer will notreduce, delay or eliminate its purchases from us, which would likely cause ourrevenues to decline. In addition, we do not carry credit insurance on ouraccounts receivables and any difficulty in collecting outstanding amounts duefrom our customers, particularly customers that place larger orders orexperience financial difficulties, could adversely affect our revenues and ournet income. Because our sales are made by means of standard purchase ordersrather than long-term contracts, we cannot assure you that these customers willcontinue to purchase quantities of our products at current levels, or at all.

***We entered into a strategic alliance with Vitesse for the developmentof our Serial Attached SCSI ROC product, and if Vitesse fails to develop andbring new products to market in a timely manner, it could result in an adverseeffect on our business and financial results.***    InJanuary 2005, we entered into a strategic alliance with Vitesse for themto develop and market the next generation of our Serial Attached SCSI products.Vitesse has not yet met our qualification standards for our products, which adverselyimpacted our ability to deliver to the market. We are at risk that Vitesse mayencounter challenges in fulfilling their responsibilities under this alliance,such as timely completing and introducing new product designs, maintaining thequality of new products, minimizing product costs, differentiating new productsfrom those of our competitors and achieving market acceptance of our products.  In addition, Vitesse became subject toinvestigation by the SEC and the U.S. Attorney’s office in New York regardingits historical practices with respect to the granting of stock options, whichresulted in Vitesse terminating certain of their executives. To the extent thatthese investigations cause disruptions in Vitesse’s operations, or if weotherwise encounter issues with respect to our strategic alliances, it couldhave an adverse effect on our business and financial results.

34

----

 

***We may be subject to a higher effective taxrate that could negatively affect our results of operations and financialposition.***    Historically oureffective tax rate was favorably impacted by a Singapore tax holiday relatingto certain of our products.  As a resultof the contract manufacturing agreement that we entered into with Sanmina-SCI,we will no longer qualify for this holiday. If the alternative plans we have developed to reduce our effective taxrate are not successful, our effective tax rate could increase, which wouldadversely affect our financial results.

Weheld approximately $93.7 million of cash, cash equivalents and marketablesecurities at our subsidiary in Singapore at September 30, 2006. During thefourth quarter of fiscal 2005, we repatriated $360.6 million of cash fromSingapore to the United States in connection with the American Jobs CreationAct of 2004 which provides a one-time deduction of 85% for certain dividendsfrom controlled foreign corporations. If the amount repatriated does notqualify for the one-time deduction, we could incur additional income taxes atup to the United States Federal statutory rate of 35%, which would negativelyaffect our results of operations and financial condition.

***The migration of our internationaloperations from one country to another involves risks, which may require us torecord additional tax reserves.***We will be migratingcertain foreign operations from Singapore to the Republic of Ireland and theCayman Islands during the second half of fiscal 2007.  There are inherentuncertainties associated with the tax implications of these migrations in ourforeign tax jurisdictions.  These uncertainties may result in arequirement to record additional tax reserves, and the ultimate outcome of thesepotential additional reserves may have an adverse affect on our future cashflows and financial results.

***Our dependence on new products may causeour net revenues to fluctuate or decline.***    Ourfuture success significantly depends upon our completing and introducingenhanced and new products at competitive prices and performance levels in atimely manner. The success of new product introductions depends on severalfactors, including the following:

• Designing products to meet customer needs;

• Product costs;

• Timely completion and introduction of new product designs;

• Quality of new products;

• Differentiation of new products from those of our competitors; and

• Market acceptance of our products.

Ourproduct 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 expendituresfor research and development in the future. We may fail to identify new productopportunities and may not develop and bring new products to market in a timelymanner. In addition, products or technologies developed by others may renderour products or technologies obsolete or noncompetitive, or our targetedcustomers may not select our products for design or integration into theirproducts. The failure of any of our new product development efforts could havean adverse effect on our business and financial results.

Wehave introduced RAID-enabled products based on the next generation SATAtechnology and delivered our products based on Serial Attached SCSI technologyto certain major OEMs for testing and integration. We will not succeed ingenerating significant revenues from our new SATA and Serial Attached SCSItechnology products if the market does not adapt to these new technologies,which would, over time, adversely affect our net revenues and operatingresults.

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

*Technologies:*

• ATA

• Fibre channel

• FireWire/1394

• IPsec

• iSCSI

• PCI

• PCI-Express

• PCI-X

• RAID

• Serial Attached SCSI

35

----

 

• SATA

• SCSI

• SMI-S

• Ultra DMA

• USB

*Operating Systems:*

• Linux

• Macintosh

• Netware

• OS/2

• UNIX

• Windows

Ifuser acceptance of these standards declines, or if new standards emerge, and ifwe do not anticipate these changes and develop new products, these changescould adversely affect our business and financial results.

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

• Microprocessors;

• Peripherals;

• Operating system software;

•Server motherboards; and

•Enclosures.

Wedepend on significant cooperation from these manufacturers to achieve ourdesign objectives and develop products that operate successfully with theirproducts. These companies could, from time to time, elect to make it moredifficult for us to design our products for successful operability with theirproducts. For example, if one or more of these companies were to determine thatas a result of competition or other factors, our products would not be broadlyaccepted by the markets we target, these companies may no longer work with usto plan for new products and new generations of our products, which would makeit 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 arecompatible with our technology and our markets could contract. If any of theseevents were to occur, our revenue and financial results could be adverselyaffected.

***We are subject to various environmentallaws and regulations that could impose substantial costs upon us and mayadversely affect our business.***     Tothe best of our knowledge, we have complied with the RoHS Directive timeline toeliminate lead from our products and recorded an excess inventory expense of$1.9 million related to the transition of our products to comply with the RoHSDirective in fiscal 2006.  We also workedwith our suppliers to redesign or reformulate their components containing leadto reduce or eliminate lead in our products. If any of our RoHS compliantproducts are deemed to be non-compliant, we may suffer a loss of revenue, beunable to sell affected products in certain markets or countries and be at acompetitive disadvantage.

TheEuropean Parliament has also enacted the Waste Electrical and Electronic EquipmentDirective, or WEEE Directive, which makes producers of electrical andelectronic equipment financially responsible for specified collection,recycling, treatment and disposal of past and future covered products. We mayincur financial responsibility for the collection, recycling, treatment ordisposal of products covered under the WEEE Directive. The nature and extent ofthe costs to comply and fees or penalties associated with non-compliance areunknown at this time. Costs to comply with the WEEE Directive and similarfuture legislation, if applicable, may also include legal and regulatory costsand insurance costs. We may also be required to take reserves for costs associatedwith compliance with these regulations.

***We entered into strategic alliance with ServerEngines to advance ourdevelopment of iSCSI products, and if ServerEngines fails to develop and bringnew products to market in a timely manner, it could result in an adverse effecton our business and financial results.***    In March 2005, we entered into a strategic alliance with ServerEngines todevelop and market the next generation of our IP storage products, such as 10GbiSCSI. Accordingly, we are at risk that ServerEngines may encounter challengesin fulfilling their responsibilities under these alliances, such as timelycompleting and introducing new product designs, maintaining the quality of newproducts, minimizing product costs, differentiating new products from those ofour competitors and achieving market acceptance of our products.

36

----

 

***If we do not provide adequate support during our customers’ design anddevelopment stage, or if we are unable to provide such support in a timelymanner, we may lose revenues to our competitors.***    Certainof our products are designed to meet our customers’ specifications and, to theextent we are not able to meet these expectations in a timely manner or provideadequate support during our customers’ design and development stage, ourcustomers may choose to buy similar products from another company. If this wereto occur we may lose revenues and market share to our competitors.

***If we are unable to compete effectively,our net revenues could be adversely affected.***    Themarkets for all of our products are intensely competitive and are characterizedby the following:

• Rapid technological advances;

• Frequent new product introductions;

• Evolving industry standards; and

• Price erosion.

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

Wecannot assure you that we will have sufficient resources to accomplish all ofthe following:

• Satisfy any growth in demand for our products;

• Make timely introductions of new products;

• Compete successfully in the future against existing or potentialcompetitors;

• Provide OEMs with design specifications in a timely manner; or

• Prevent price competition from eroding margins.

***If there is a shortage of components usedin our customers’ products, our sales may decline, which could adversely affectour results of operations and financial position.***    Ifour customers are unable to purchase certain components which are embedded intotheir products, their demand for our products may decline. In addition, we orour customers may be impacted by component shortages if components that complywith the RoHS Directive are not available; the RoHS Directive was enacted bythe European Parliament and restricts the sale of new electrical and electronicequipment containing certain hazardous substances, including lead that iscurrently used in some of our products. Similar shortages of components used inour products or our customers’ products could adversely affect our net revenuesand financial results in future periods.

***As part of our overall strategy we may make acquisitions and enter intostrategic alliances.  Costs associated withthese acquisitions or strategic alliances may adversely affect our results ofoperations, which could be exacerbated if we are unable to integrate theacquired companies, products or technologies.***    Aspart of our overall strategy we may acquire or invest in complementarycompanies, products or technologies and enter into strategic alliances withother companies. In order to be successful in these activities, we must:

• Conduct acquisitions that enhance our time to market with newproducts;

• Successfully prevail over competing bidders for target acquisitionsat an acceptable price;

• Invest in companies and technologies that contribute to the growth ofour business;

• Integrate acquired operations into our business and maintain uniformstandards, controls and procedures;

• Retain the key employees of the acquired operations; and

• Develop the capabilities necessary to exploit newly acquiredtechnologies.

Thebenefits of acquisitions or strategic alliances may prove to be less thananticipated and may not outweigh the costs reported in our financialstatements.

Completingany potential future acquisitions or strategic alliances could causesignificant diversions of management time and resources. If we acquire newbusinesses, products or technologies in the future, we may be required toassume warranty claims or other contingent liabilities, including liabilitiesunknown at the time of acquisition, and amortize significant amounts of otherintangible assets and, over time, recognize significant charges for impairmentof goodwill, other intangible assets or other losses. If we 

37

----

 

consummate any potential future acquisitions in whichthe consideration consists of stock or other securities, our existingstockholders’ ownership may be significantly diluted. If we proceed with anypotential future acquisitions in which the consideration is cash, we may berequired to use a substantial portion of our available cash. In addition, wemay be required to invest significant resources in order to perform under astrategic alliance or to complete an acquisition, which could adversely affectour results of operations, at least in the short-term, even if we believe thestrategic alliance or acquisition will benefit us in the long-term. We may notbe successful in overcoming these risks or any other problems encountered inconnection with these or other business combinations, investments or strategicalliances. These transactions may adversely affect our business, financialposition and operating results.

***Product quality problems could lead toreduced revenues and gross margins.***    Weproduce highly complex products that incorporate leading-edge technologies,including both hardware and software. Software often contains “bugs” which caninterfere with expected operations. We cannot assure you that our pre-shipmenttesting programs will be adequate to detect all defects which might interferewith customer satisfaction, reduce sales opportunities, or affect our grossmargins if the costs of remedying the problems exceed reserves established forthat purpose. An inability to cure a product defect could result in the failureof a product line, and withdrawal, at least temporarily, from a product ormarket segment, damage to our reputation, inventory costs, productreengineering expenses, and a material impact on revenues and gross margins.

***We currently purchase all of the finished production silicon wafersused in our products from wafer suppliers, and if they fail to meet ourmanufacturing needs, it would delay our production and our product shipments tocustomers and negatively affect our operations.***    Independentfoundries manufacture to our specifications all of the finished silicon wafersused for our products. We currently purchase finished production silicon wafersused in our products from Taiwan Semiconductor Manufacturing Company, or TSMC,and IBM. The manufacture of semiconductor devices is sensitive to a widevariety of factors, including the following:

• The availability of raw materials;

• The availability of manufacturing capacity;

• Transition to smaller geometries of semiconductor devices;

• The level of contaminants in the manufacturing environment;

• Impurities in the materials used; and

• The performance of personnel and equipment.

Wecannot assure you that manufacturing problems may not occur in the future. Ashortage of raw materials or production capacity could lead our wafer suppliersto allocate available capacity to other customers. Any prolonged inability toobtain wafers with competitive performance and cost attributes, adequate yieldsor timely deliveries would delay our production and our product shipments, andcould have an adverse effect on our business and financial results. We expectthat our wafer suppliers will continually seek to convert their processes formanufacturing wafers to more advanced process technologies. Such conversionsentail inherent technological risks that can affect yields and delivery times.If for any reason the wafer suppliers we use are unable or unwilling to satisfyour wafer needs, we will be required to identify and qualify additionalsuppliers. Additional wafer suppliers may be unavailable, may take significantamounts of time to qualify or may be unable to satisfy our requirements on atimely basis.

***We depend on the efforts of our distributors, which if reduced, couldresult in a loss of sales of our products in favor of competitive offerings.***    Wederived approximately 42% of our revenues for the first half of fiscal 2007from independent distributor and reseller channels. Our financial results couldbe adversely affected if our relationships with these distributors or resellerswere to deteriorate or if the financial condition of these distributors orresellers were to decline.

Ourdistributors generally offer a diverse array of products from several differentmanufacturers. Accordingly, we are at risk that these distributors may givehigher priority to selling products from other suppliers. A reduction in salesefforts by our current distributors could adversely affect our business andfinancial results. For example, some of our distributors have threatened tostop selling our products or make pricing of our products non-competitive if wedo not agree to absorb their costs to comply with the RoHS and WEEE Directiveswith respect to our products.  Ourdistributors build inventories in anticipation of future sales, and if suchsales do not occur as rapidly as they anticipate, our distributors willdecrease the size of their product orders. If we decrease our price protectionor distributor-incentive programs, our distributors may also decrease theirorders from us. In addition, we have from time to time taken actions to reducelevels of products at distributors and may do so in the future. These actionsmay affect our net revenues and negatively affect our financial results.

***If we do not meet our restructuringobjectives, we may have to implement additional plans in order to reduce ouroperating costs and may, as a result, incur additional material restructuringcharges.***    We have implementedseveral restructuring plans to reduce our operating costs in the first half offiscal 2007 and full years for fiscal 2006 and fiscal 2005, and recordedrelated restructuring charges of $4.1 million, $10.4 million and$5.9 million, respectively. The plans included primarily the reduction ofour workforce and the closure of our manufacturing operations in Singapore. Thegoals of these plans were to support future growth opportunities, focus oninvestments that grow revenues and increase operating margins. If we do notmeet our restructuring objectives, 

38

----

 

we may have to implement additional restructuringplans to reduce our operating costs, which could cause us to incur materialrestructuring charges. Further, these restructuring plans may not achieve theoriginal goals we had in implementing them resulting in a potential adverseeffect on employee capabilities that could harm our efficiency and our abilityto act quickly and effectively in the rapidly changing technology markets inwhich we sell our products.

***Some of our products contain “open source”software, and any failure to comply with the terms of one or more of these opensource licenses could negatively affect our business.***    Someof our products are distributed with software licensed by its authors or otherthird parties under so-called “open source” licenses, including, for example,the GNU General Public License, or GPL, GNU Lesser General Public License, orLGPL, the Mozilla Public License, the BSD License, and the Apache License. Someof those licenses may require as a condition of the license that we makeavailable source code for modifications or derivative works we create basedupon, incorporating, or using the open source software, that we provide noticeswith our products, and/or that we license such modifications or derivativeworks under the terms of a particular open source license or other licensegranting third parties certain rights of further use. If an author or otherthird party that distributes such open source software were to allege that wehad not complied with the conditions of one or more of those open sourcelicenses, we could be required to incur legal expenses in defending againstsuch allegations, and if our defenses were not successful we could be enjoinedfrom distribution of the products that contained the open source software andrequired to either make the source code for the open source software available,to grant third parties certain rights of further use of our software, or toremove the open source software from our products, which could disrupt ourdistribution and sale of some of our products. In addition, if we combine ourproprietary software with open source software in a certain manner, we couldunder some of the open source licenses, be required to release the source codeof our proprietary software. If an author or other third party that distributesopen source software were to obtain a judgment against us based on allegationsthat we had not complied with the terms of any such open source licenses, wecould also be subject to liability for copyright infringement damages andbreach of contract for our past distribution of such open source software.

***Our operations depend on key personnel, theloss of whom could affect the growth and success of our business.***    Inorder to be successful, we must retain and motivate our executives, ourprincipal engineers and other key employees, including those in managerial,technical, marketing and information technology support positions. In particular,our product generation efforts depend on hiring and retaining qualifiedengineers. Competition for experienced management, technical, marketing andsupport personnel remains intense. For example, we transitioned certainresearch and development efforts to North Carolina, where we have experiencedsignificant competition in our efforts to attract and retain qualified softwareengineers. The loss of any of these key employees could have a significantimpact on our operations. We also must continue to motivate employees and keepthem focused on our strategies and goals, which may be particularly difficultdue to morale challenges posed by workforce reductions and general uncertainty.

***Our international operations involve risks,and may be subject to political or other non-economic barriers to our beingable to sell our products in certain countries, local economic conditions thatreduce demand for our products among our target markets and potentialdisruption in the supply of necessary components.***    Manyof our subcontractors are primarily located in Asia and we have sales officesand customers located throughout Europe, Japan and other countries. Ourinternational operations and sales are subject to political and economic risks,including political instability, currency controls, changes in import/exportregulations, tariffs and freight rates. In addition, because our primary wafersupplier, TSMC, is located in Taiwan, we may be subject to certain risksresulting from political instability in Taiwan, including conflicts betweenTaiwan and the People’s Republic of China. These and other international riskscould result in the creation of political or other non-economic barriers to ourbeing able to sell our products in certain countries, create local economicconditions that reduce demand for our products among our target market orexpose us to potential disruption in the supply of necessary components orotherwise adversely affect our ability to generate revenue and operateeffectively.

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

***If the carrying value of our long-lived assets is notrecoverable, an impairment loss must be recognized which would adversely affectour financial results.***    Certainevents or changes in circumstances would require us to assess therecoverability of the carrying amount of our long-lived assets. For example, inthe first quarter of fiscal 2007, we recorded an impairment charge of$13.2 million on intangible assets related to our decision to retain andoperate the Snap Systems portion of the server business. Of the resulting impairment$5.6 million related to existing technology, $3.1 million was recorded as areduction of core technology, and $4.5 million related to trademarks.In fiscal 2006, we recorded a goodwillimpairment charge of $90.6 million related to our DPS segment. In fiscal 2005,we recorded a goodwill impairment charge of $52.3 million related to ourformer Channel segment. In fiscal 2004, we recorded an impairment charge of$5.0 million related to certain properties classified as held-for sale anda charge of $1.0 million relating to the decline in value of a minorityinvestment. We will continue to evaluate the recoverability of the carryingamount of our long-lived assets, and we may incur substantial impairmentcharges which could adversely affect our financial results.

39

----

*** ***

***If actual results or events differmaterially from those contemplated by us in making estimates and assumptions,our reported financial condition and results of operations for future periodscould be materially affected.***    Thepreparation of financial statements in conformity with accounting principlesgenerally accepted in the United States of America requires management to makeestimates and assumptions that affect the amounts reported in the consolidatedfinancial statements and accompanying notes. For example, we have identifiedkey accounting estimates in our Critical Accounting Policies in our AnnualReport on Form 10-K for the fiscal year ended March 31, 2006, which includerevenue recognition, inventory, goodwill, stock compensation expense and incometaxes. In addition, we have included a new Critical Accounting Policy in thisForm 10-Q related to stock-based compensation. Furthermore, Note 1 of theNotes to Consolidated Financial Statements in our Annual Report on Form 10-Kfor the fiscal year ended March 31, 2006 describes the significant accountingpolicies essential to preparing our consolidated financial statements. Thepreparation of these financial statements requires estimates and assumptionsthat affect the reported amounts and disclosures. Although we believe that ourjudgments and estimates are appropriate and correct, actual future results maydiffer materially from our estimates.

***If we are unable to protect and enforce ourintellectual property rights, we may be unable to compete effectively.***    Althoughwe actively maintain and defend our intellectual property rights, we may beunable to adequately protect our proprietary rights. In addition, the laws ofcertain territories in which our products are or may be developed, manufacturedor sold, including Asia and Europe, may not protect our products andintellectual property rights to the same extent as the laws of the UnitedStates. Because we conduct a substantial portion of our operations outside ofthe United States and sell to a worldwide customer base, we are more dependenton our ability to protect our intellectual property in internationalenvironments than would be the case if a larger portion of our operations weredomestic.

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

***Third parties may assert infringement claims against us, which may beexpensive to defend and could divert our resources.***    Fromtime to time, third parties assert exclusive patent, copyright and otherintellectual property rights to our key technologies, and we expect to continueto receive such claims in the future. For example, in fiscal 2005, we, NevadaSCSI Enterprises, Inc. and Thomas A. Gafford (jointly, “NSE”) entered intoa license and release agreement, pursuant to which we paid NSE$1.7 million as a one-time, fully paid-up license fee to settle NSE’sclaims that some of our products infringed certain patents.  In addition, we entered into a patentcross-license agreement with IBM in May 2000. Under this agreement, whichwas amended in March 2002, we received a release from infringement claimsprior to January 1, 2000 and received the right to use certain of IBM’spatents through June 30, 2007. In consideration, we paid, in annualinstallments, an aggregate patent fee of $13.3 million throughJune 30, 2004. The risks of our receiving additional claims from thirdparties may be increased in periods such as the one that we are currentlyentering where we are beginning to offer product lines employing newtechnologies relative to our existing products.

Wecannot assure you that third parties will not assert other infringement claimsagainst us, directly or indirectly, in the future, that assertions by thirdparties will not result in costly litigation or that we would prevail in suchlitigation or be able to license any valid and infringed intellectual propertyfrom third parties on commercially reasonable terms. These claims may beasserted in respect of intellectual property that we own or that we licensefrom others. In addition to claims brought against us by third parties, we mayalso bring litigation against others to protect our rights. Intellectualproperty litigation, regardless of the outcome, could result in substantialcosts to us and diversion of our resources, and could adversely affect ourbusiness and financial results.

***We may be required to pay additionalfederal income taxes which could negatively affect our results of operationsand financial position.***    We havebeen, or are, subject to IRS audits for our fiscal years 1994 through 2003. Thefiscal 1994 through fiscal 1996 cycle and fiscal 1997 cycle, which are docketedin the United States Tax Court, were resolved in December 2001 and September2006, respectively. The outcome of the fiscal 1994 through fiscal 1996 cycledid not have a material adverse effect on our financial position or results ofoperations, as sufficient tax provisions had been made. The outcome of thefiscal 1997 cycle resulted in the release of tax reserves in September 2006.The final Tax Court stipulations will be filed when the subsequent audit cyclesare completed. Tax credits that were generated but not used in subsequent yearsmay be carried back to the respective fiscal 1994 through 1996 and fiscal 1997audit cycles. In addition, in fiscal 2005, we resolved all issues for fiscal1998 through fiscal 2001 audit cycles, other than the tax credits that weregenerated but not used in subsequent years that may be carried back. The IRS iscurrently auditing our Federal income tax returns for the fiscal 2002 and 2003audit cycle. We believe that we have provided sufficient tax provisions forthese years and the ultimate outcome of the IRS audits will not have a materialadverse impact on our financial position or results of operations in futureperiods. However, we cannot predict with certainty how these matters will beresolved and whether we will be required to make additional tax payments.

***We may be engaged in legal proceedings thatcould cause us to incur unforeseen expenses and could occupy a significantamount of our management’s time and attention.***    Fromtime to time we are subject to litigation or claims that could negativelyaffect our business operations and financial position. Such disputes couldcause us to incur unforeseen expenses, could occupy a significant amount of ourmanagement’s time and attention, and could negatively affect our businessoperations and financial position.

40

----

*** ***

***We have in the past obtained cash fromcapital market financing, and if we need to seek additional financing, it maynot be available on favorable terms.***    Inorder to finance strategic acquisitions, capital asset acquisitions and othergeneral corporate needs, we have in the past relied, in part, on the capitalmarkets. Historically, we have been able to access capital markets, but thisdoes not necessarily guarantee that we will be able to access these markets inthe future or at terms that are acceptable to us. The availability of capitalin these markets is affected by several factors, including geopolitical risk,the interest rate environment and the condition of the economy as a whole. Inaddition, our own operating performance, capital structure and expected futureperformance impacts our ability to raise capital. For example, in the thirdquarter of fiscal 2006, Standard and Poor’s Ratings Services downgraded oursubordinated debt rating from B- to CCC+. We believe that our current cash,cash equivalents, short-term investments and future cash provided by operationswill be sufficient to fund our needs for at least the next twelve months.However, if our operating performance falls below expectations, we may needadditional funds, which may not be available on favorable terms, if at all.

***We are exposed to fluctuations in foreigncurrency exchange rates.***    Because asignificant portion of our business is conducted outside the United States, weface exposure to adverse movements in non-United States currency exchangerates. These exposures may change over time as business practices evolve and couldhave an adverse impact on our financial results and cash flows. Historically,our exposures have related to non-dollar-denominated operating expenses inEurope and Asia. We began Euro-denominated sales to our distribution customersin the European Union in the fourth quarter of fiscal 2003. An increase in thevalue of the dollar could increase the real cost to our customers of ourproducts in markets outside the United States where we sell in dollars, and aweakened dollar could increase the cost of local operating expenses andprocurement.

***We hold minority interests in privatelyheld venture funds, and if these venture funds face financial difficulties intheir operations, our investments could be impaired.***    Wecontinue to hold minority interests in privately held venture funds. AtSeptember 30, 2006, the carrying value of such investments aggregated$2.9 million. We have also committed to provide additional funding of upto $0.1 million. These investments are inherently risky because theseventure funds invest in companies that may still be in the development stage ordepend on third parties for financing to support their ongoing operations. Inaddition, the markets for the technologies or products of these companies aretypically in the early stages and may never develop. If these companies do nothave adequate cash funding to support their operations, or if they encounterdifficulties developing their technologies or products, the venture funds’investments in these companies may be impaired, which in turn, could result inimpairment of our investment in these venture funds.

***Our spin-off of Roxio Inc., which isnow known as Napster Inc., may have potential subsequent tax liabilitiesthat could negatively affect our results of operations.***    Pursuantto our distribution of the Roxio, Inc. common stock, we received anopinion from PricewaterhouseCoopers LLP, or PwC, regarding the tax-free natureof the transaction to us and to our stockholders under Section 355 of theInternal Revenue Code. The validity of the PwC opinion relating to thequalification of the distribution as a tax-free transaction is subject tofactual representations and assumptions. We are not aware of any facts orcircumstances that would cause such representations and assumptions to beuntrue. In addition, the opinion of PwC is not binding on the IRS. If Napsteror we fail to conform to the requirements set forth in the IRS regulations, itcould cause the distribution to be taxable to us and to our stockholders, andour financial results could be adversely affected.

***Changes in securities laws and regulationshave increased and may continue to increase our costs.***    Changesin the laws and regulations affecting public companies, including theprovisions of the Sarbanes-Oxley Act of 2002 and rules promulgated by theSecurities and Exchange Commission, have increased and may continue to increaseour expenses as we evaluate the implications of these rules and devoteresources to respond to their requirements. In particular, we incurredadditional administrative expense to implement Section 404 of theSarbanes-Oxley Act, which requires management to report on, and our independentregistered public accounting firm to attest to, our internal control overfinancial reporting.

Inaddition, the NASDAQ Global Market, on which our common stock is listed, hasalso adopted comprehensive rules and regulations relating to corporategovernance. These laws, rules and regulations have increased and will continueto increase the scope, complexity and cost of our corporate governance,reporting and disclosure practices. We also expect these developments to makeit more difficult and more expensive for us to obtain director and officerliability insurance in the future, and we may be required to accept reducedcoverage or incur substantially higher costs to obtain coverage. Further, ourboard members, Chief Executive Officer and Chief Financial Officer could facean increased risk of personal liability in connection with the performance oftheir duties. As a result, we may have difficultly attracting and retainingqualified board members and executive officers, which would adversely affectour business.

***Internal control deficiencies or weaknessesthat are not yet identified could emerge.***    Overtime we may identify and correct deficiencies or weaknesses in our internalcontrol over financial reporting and, where and when appropriate, report on theidentification and correction of these deficiencies or weaknesses. However, theinternal control procedures can provide only reasonable, and not absolute,assurance that deficiencies or weaknesses are identified. Deficiencies orweaknesses that are not yet identified could emerge, and the identification andcorrections of these deficiencies or weaknesses could have a material impact onour results of operations.

41

----

 

***Internal control issues that appear minornow may later become material weaknesses.***    Weare required to publicly report on deficiencies or weaknesses in our internalcontrol over financial reporting that meet a materiality standard as requiredby law and related regulations and interpretations. Management may, at a pointin time, accurately categorize a deficiency or weakness as immaterial or minorand therefore not be required to publicly report such deficiency or weakness. Suchdetermination, however, does not preclude a change in circumstances such thatthe deficiency or weakness could, at a later time, become a material weaknessthat could have a material impact on our results of operations.

***We may encounter natural disasters, whichcould cause disruption to our employees or interrupt the manufacturing processfor our products.***    Our operationscould be subject to natural disasters and other business disruptions, whichcould seriously harm our revenues and financial condition and increase ourcosts and expenses. Our corporate headquarters are located in California, nearmajor earthquake faults. Additionally, our primary wafer supplier, TSMC, islocated in Taiwan, which has experienced significant earthquakes in the past. Asevere earthquake could cause disruption to our employees or interrupt themanufacturing process, which could affect TSMC’s ability to supply wafers tous, which would negatively affect our business and financial results. Theultimate impact on us and our general infrastructure of being located nearmajor earthquake faults is unknown, but our net revenues and financialcondition and our costs and expenses could be significantly impacted in theevent of a major earthquake.

***Manmade problems such as computer virusesor terrorism may disrupt our operations and harm our operating results.***    Despiteour implementation of network security measures, our servers are vulnerable tocomputer viruses, break-ins and similar disruptions from unauthorized tamperingwith our computer systems. Any such event could have an adverse effect on ourbusiness, operating results, and financial condition. In addition, the effectsof war or acts of terrorism could have an adverse effect on our business,operating results, and financial condition. In addition, as a company withheadquarters and significant operations located in the United States, we may beimpacted by actions against the United States. We are predominantly uninsuredfor losses and interruptions caused by terrorist acts and acts of war.

***We may experience significant fluctuationsin our stock price, which may, in turn, significantly affect the trading priceof our convertible notes.***    Ourstock has experienced substantial price volatility, particularly as a result ofquarterly variations in our operating results, the published expectations ofanalysts and as a result of announcements by our competitors and us. Inaddition, the stock market has experienced price and volume fluctuations thathave affected the market price of many technology companies, in particular, andthat have often been unrelated to the operating performance of such companies.In addition, the price of our securities may also be affected by generalglobal, economic and market conditions and the cost of operations in one ormore of our product markets. While we cannot predict the individual effect thatthese factors may have on the price or our securities, these factors, eitherindividually or in the aggregate, could result in significant variations in theprice of our common stock during any given period of time. These fluctuationsin our stock price also impact the price of our outstanding convertiblesecurities and the likelihood of the convertible securities being convertedinto our common stock.

 

42

----

 

**Item 4.   Submissionof Matters to a Vote of Security Holders**

OurAnnual Meeting of Stockholders was held on September 14, 2006, by means ofremote communication at Adaptec’s website at http://investor.adaptec.com and bytelephone conference at (800) 289-0572, passcode 3004936. Of the total115,980,238 shares of our common stock outstanding as of the record date,105,819,303 shares (91%) were present or represented by proxy at the meeting.The table below presents the voting results of election of our Board ofDirectors.

|                                | ** ** | **Votes**   | ** ** | **Votes  Withheld** | ** ** |
|--------------------------------|------------|-------------|------------|---------------------|------------|
|                           |       |        |       |                |       |
| Jon S. Castor                  |       | 104,767,880 |       | 1,051,423           |       |
| Joseph S. Kennedy              |       | 104,647,915 |       | 1,171,388           |       |
| Robert J. Loarie               |       | 101,805,865 |       | 4,013,438           |       |
| D. Scott Mercer                |       | 102,583,415 |       | 3,235,888           |       |
| Judith M. O’Brien         |       | 104,762,729 |       | 1,056,574           |       |
| Charles J. Robel               |       | 102,154,635 |       | 3,664,668           |       |
| S. “Sundi” Sundaresh |       | 102,753,995 |       | 3,065,308           |       |
| Douglas E. Van Houweling       |       | 102,103,065 |       | 3,716,238           |       |

The stockholders approvedthe Adaptec, Inc. 2006 Director Plan. The proposal received 63,305,389affirmative votes, 13,398,683 negative votes, 226,632 abstentions and28,888,599 broker non-votes.

Inaddition, our stockholders ratified and approved the appointment ofPricewaterhouseCoopers LLP as our independent registered public accounting firmfor the fiscal year ending March 31, 2007. The proposal received100,664,322 affirmative votes, 2,437,930 negative votes, 2,717,051 abstentionsand no broker non-votes.

**Item 6.   Exhibits**
| Exhibit  No. | ** ** | **Exhibit** | ** ** | **Filed with  This 10-Q**                                                                                                         | ** ** | **Form** | ** ** | **File No.** | ** ** | **Filing Date** | ** ** | **Exhibit  No. as  Filed** |
|--------------|------------|-------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|----------|------------|--------------|------------|-----------------|------------|----------------------------|
|         | 3.1        |        |       | Amendment No. 1  to Amended and Restated Bylaws of the Company                                                                    |       |     |       |         |       | 8-K             | ** ** | 000-15701                  |   |   | 07/20/06 |   |   |   | 3.01 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            | ** ** |                       |   |   |   |   |   |   |   |   |
|         | 3.2        |        |       | Amendment No. 2  to Amended and Restated Bylaws of the Company                                                                    |       |     |       |         |       | 8-K             | ** ** | 000-15701                  |   |   | 07/20/06 |   |   |   | 3.02 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            | ** ** |                       |   |   |   |   |   |   |   |   |
|         | 3.3        |        |       | Amendment No. 3  to Amended and Restated Bylaws of the Company                                                                    |       |     |       |         |       | 8-K             | ** ** | 000-15701                  |   |   | 07/20/06 |   |   |   | 3.03 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            | ** ** |                       |   |   |   |   |   |   |   |   |
|         | 10.1       |        |       | Non-Employee Director Compensation  Policy, as amended                                                                            |       |     | X          |         |       |            | ** ** |                       |   |   |   |   |   |   |   |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.2       |        |       | Adaptec, Inc. 2006 Director Plan                                                                                                  |       |     |       |         |       | DEF  14A        |       | 000-15701                  |   |   | 07/28/06 |   |   |   | A |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.3       |        |       | Adaptec, Inc. 2004 Equity Incentive Plan, as amended  on August 24, 2006                                                          |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 08/29/06 |   |   |   | 99.01 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.4       |        |       | Notice of Restricted Stock Grant and Restricted  Stock Agreement under 2006 Director Plan                                         |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 09/15/06 |   |   |   | 99.01 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.5       |        |       | Notice of Stock Option Grant and Stock Option Award  Agreement under 2006 Director Plan                                           |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 09/15/06 |   |   |   | 99.02 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.6       |        |       | Notice of Stock Appreciation Right Award and Stock  Appreciation Right Award Agreement under 2006 Director Plan                   |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 09/15/06 |   |   |   | 99.03 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.7       |        |       | Notice of Restricted Stock Unit Award and Restricted  Stock Unit Award Agreement under 2006 Director Plan                         |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 09/15/06 |   |   |   | 99.04 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.8       |        |       | Offer Letter between the Company and Judith M.  O’Brien, dated July 14, 2006.                                                |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 07/20/06 |   |   |   | 99.01 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 10.9       |        |       | Offer Letter between the Company and Jon S. Castro,  dated July 17, 2006.                                                         |       |     |       |         |       | 8-K             |       | 000-15701                  |   |   | 07/20/06 |   |   |   | 99.02 |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 31.1       |        |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |       |     | X          |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 31.2       |        |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |       |     | X          |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         |       |        |       |                                                                                                                              |       |     |       |         |       |            |       |                       |   |   |   |   |   |   |   |   |
|         | 32.1       |        |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |       |     | X          |         |       |            |       |                       |   |   |   |   |   |   |   |   |

 

43

----

**SIGNATURES**

Pursuant to the requirements ofthe Securities Exchange Act of 1934, the registrant has duly caused this reportto be signed on its behalf by the undersigned hereunto duly authorized.

| **ADAPTEC, INC.** |   |                                        |
|-------------------|--------|---------------------------------------------|
|              |   |                                        |   |   |
| By:               |   | /s/ CHRISTOPHER  G. O’MEARA            |   |   |
|              |   | Christopher G.  O’Meara                |   |   |
|              |   | Vice President  and Chief Financial Officer |   | Date: November 8, 2006 |
|              |   | (principal  financial officer)              |   |   |
|              |   |                                        |   |   |
| By:               |   | /s/ JOHN M.  WESTFIELD                      |   |   |
|              |   | John M.  Westfield                          |   |   |
|              |   | Vice President  and Corporate Controller    |   |   |
|              |   | (principal  accounting officer)             |   | Date: November 8, 2006 |

 

44

----

**EXHIBIT INDEX**

** **
| Exhibit  No. | ** ** | **Exhibit**                                                                                                                       | ** ** | **Filed with  This 10-Q** | ** ** | **Form** | ** ** | **File No.** | ** ** | **Filing Date** | ** ** | **Exhibit  No. as  Filed** |
|--------------|------------|-----------------------------------------------------------------------------------------------------------------------------------|------------|---------------------------|------------|----------|------------|--------------|------------|-----------------|------------|----------------------------|
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 3.1          |       | Amendment No. 1 to Amended and Restated Bylaws of  the Company                                                                    |       |                      |       | 8-K      |       | 000-15701    |       | 07/20/06        |       | 3.01                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 3.2          |       | Amendment No. 2 to Amended and Restated Bylaws of  the Company                                                                    |       |                      |       | 8-K      |       | 000-15701    |       | 07/20/06        |       | 3.02                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 3.3          |       | Amendment No. 3 to Amended and Restated Bylaws of  the Company                                                                    |       |                      |       | 8-K      |       | 000-15701    |       | 07/20/06        |       | 3.03                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.1         |       | Non-Employee Director Compensation Policy, as  amended                                                                            |       | X                         |       |     |       |         |       |            |       |                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.2         |       | Adaptec, Inc. 2006 Director Plan                                                                                                  |       |                      |       | DEF 14A  |       | 000-15701    |       | 07/28/06        |       | A                          |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.3         |       | Adaptec, Inc. 2004 Equity Incentive Plan, as amended  on August 24, 2006                                                          |       |                      |       | 8-K      |       | 000-15701    |       | 08/29/06        |       | 99.01                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.4         |       | Notice of Restricted Stock Grant and Restricted  Stock Agreement under 2006 Director Plan                                         |       |                      |       | 8-K      |       | 000-15701    |       | 09/15/06        |       | 99.01                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.5         |       | Notice of Stock Option Grant and Stock Option Award  Agreement under 2006 Director Plan                                           |       |                      |       | 8-K      |       | 000-15701    |       | 09/15/06        |       | 99.02                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.6         |       | Notice of Stock Appreciation Right Award and Stock  Appreciation Right Award Agreement under 2006 Director Plan                   |       |                      |       | 8-K      |       | 000-15701    |       | 09/15/06        |       | 99.03                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.7         |       | Notice of Restricted Stock Unit Award and Restricted  Stock Unit Award Agreement under 2006 Director Plan                         |       |                      |       | 8-K      |       | 000-15701    |       | 09/15/06        |       | 99.04                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.8         |       | Offer Letter between the Company and Judith M.  O’Brien, dated July 14, 2006.                                                |       |                      |       | 8-K      |       | 000-15701    |       | 07/20/06        |       | 99.01                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 10.9         |       | Offer Letter between the Company and Jon S. Castro,  dated July 17, 2006.                                                         |       |                      |       | 8-K      |       | 000-15701    |       | 07/20/06        |       | 99.02                      |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 31.1         |       | Certification of Chief Executive Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |       | X                         |       |     |       |         |       |            |       |                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 31.2         |       | Certification of Chief Financial Officer pursuant to  Section 302 of the Sarbanes-Oxley Act of 2002.                              |       | X                         |       |     |       |         |       |            |       |                       |
|         |       |                                                                                                                              |       |                      |       |     |       |         |       |            |       |                       |
| 32.1         |       | Certification of Chief Executive Officer and Chief  Financial Officer pursuant to Section 906 of the Sarbanes-Oxley Act of  2002. |       | X                         |       |     |       |         |       |            |       |                       |

 

45

----