Our international operations involve a number of political, economic and other risks that could adversely affect our ability to sell our products in certain countries, create local economic conditions that reduce demand for our products among our target markets and expose us to potential disruption in the supply of necessary components.     Our international operations and sales are subject to political and economic risks, including political instability, currency controls, and changes in import/export regulations, tariffs and freight rates. We maintain a research and development center in Bangalore, India, which we expanded in fiscal 2007. Many of our subcontractors are primarily located in Asia and we have sales offices and customers located throughout Europe, Japan and other countries.  In addition, because our primary wafer supplier, TSMC, is located in Taiwan, we may be subject to certain risks resulting from political instability in Taiwan, including conflicts between Taiwan and the People's Republic of China. These and other international risks could result in the creation of political or other non-economic barriers to our being able to sell our products in certain countries, create local economic conditions that reduce demand for our products among our target markets, expose us to potential disruption in the supply of necessary components or otherwise adversely affect our ability to generate revenue and operate effectively. In addition, the operations of our remote locations are subject to management oversight and control.If our business practices and corporate controls are not adhered to worldwide, our business and financial results could be adversely affected.

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

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

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

Our charter documents and Delaware law contain anti-takeover provisions that could prevent, discourage or delay a change in control or management, which may affect the price of our common stock. Some provisions of our certificate of incorporation and bylaws could have the effect of making it more difficult for a potential acquirer to acquire a majority of our outstanding voting stock. These include completing procedural requirements for stockholders holding 5% of voting shares to take action by written consent and restricting the ability of stockholders to call special meetings. In addition, the indenture relating to the 3/4% Notes provides that in the event of certain changes in control, each holder of the 3/4% Notes will have the right to require us to repurchase such holder's 3/4% Notes at a price equal to the principal amount of the 3/4% Notes being purchased, plus any accrued and unpaid interest. We are also subject to provisions of Section 203 of the Delaware General Corporation Law which prohibits us from engaging in any business combination with an interested stockholder for a period of three years from the date the person became an interested stockholder, unless certain conditions are met. This restriction could have the effect of delaying or preventing a change of control or management.

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

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

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

________________________

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

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

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

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

We believe our existing facilities and equipment are well maintained and in good operating condition, and we believe our facilities are sufficient to meet our needs for the foreseeable future. Our future facilities requirements will depend upon our business, and we believe additional space, if required, can be obtained on reasonable terms.

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

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

Mr. Subramanian Sundaresh (age 51) has served as our Chief Executive Officer since November 2005, President since May 2005 and briefly served as our Executive Vice President of Marketing and Product Development in May 2005. Prior to rejoining Adaptec, Mr. Sundaresh provided consulting services at various companies, including Adaptec, from December 2004 to April 2005. Between July 2002 and December 2004, Mr. Sundaresh served as President and Chief Executive Officer of Candera, Inc., a supplier of network storage controllers. From July 1998 to April 2002, Mr. Sundaresh served as President and Chief Executive Officer of Jetstream Communications, a provider of Voice over Broadband solutions. Mr. Sundaresh previously worked at Adaptec from March 1993 to June 1998 as Vice President and General Manager for the Personal I/O business and Corporate Vice President of Worldwide Marketing.

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

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

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

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

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

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

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

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

Cash used in financing activities was $3.2 million and $14.9 million in fiscal years 2007 and 2006, respectively, compared to cash provided by financing activities of $8.5 million in fiscal 2005. The cash used in financing activities in fiscal years 2007 and 2006 was driven by the repurchase of our 3% Notes for $10.6 million and $24.3 million, respectively, offset by the issuance of common stock in connection with purchases made under our employee stock purchase plan and stock option exercises, of $7.4 million and $9.4 million, respectively. The cash provided by financing activities in fiscal 2005 was related to net proceeds received from our issuance of common stock in connection with purchases made under our employee stock purchase plan and the exercise of stock options.

At March 31, 2007, we had $572.4 million in unrestricted cash, cash equivalents and marketable securities, of which approximately $93.8 million was held by our Singapore and Cayman Licensing subsidiaries. In the fourth quarter of fiscal 2005, we repatriated $360.6 million of undistributed earnings from Singapore to the United States and incurred a tax liability of $17.6 million. The repatriated amounts are being used to fund a qualified Domestic Reinvestment Plan, as required by the American Jobs Creation Act of 2004. If we do not spend the repatriated funds in accordance with our reinvestment plan, we may incur additional tax liabilities. We have not provided for U.S. deferred income taxes or foreign withholding taxes on the remaining undistributed earnings of approximately $255.1 million since we do not have any current plans to repatriate the remaining undistributed earnings from our foreign subsidiaries to our United States parent company. If we were to do so, additional income taxes at the combined United States Federal and state statutory rate of approximately 40% could be incurred from the repatriation.

In December 2003, we issued $225.0 million in aggregate principal amount of our 3/4% Notes. The issuance costs associated with the 3/4% Notes totaled $6.8 million and the net proceeds from the offering were $218.2 million. In conjunction with the issuance of the 3/4% Notes, we spent $64.1 million to enter into a convertible bond hedge transaction. We also received $30.4 million from the issuance of warrants to purchase up to 19.2 million shares of our common stock. Please refer to Note 7 for a detailed discussion of our debt and equity transactions. At March 31, 2007, we had $225.0 million of aggregate principal amount related to our 3/4% Notes that is due in December 2023. Each holder of the 3/4% Notes may require us to purchase all or a portion of its 3/4% Notes on December 22, 2008 at a price equal to 100.25% of the 3/4% Notes to be purchased plus accrued and unpaid interest. In addition, each holder of the 3/4% Notes may require us to purchase all or a portion of its 3/4% Notes on December 22, 2013, on December 22, 2018 or upon the occurrence of a change of control (as defined in the indenture governing the 3/4% Notes) at a price equal to the principal amount of 3/4% Notes being purchased plus any accrued and unpaid interest.

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

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

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

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

The following table summarizes our contractual obligations at March 31, 2007.

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

________________________

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

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

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

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

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

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

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

Stock-based compensation: In the first quarter of fiscal 2007, we adopted SFAS No. 123(R) using the modified prospective method and began accounting for our stock-based compensation 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 the fair-value of the award and is recognized as expense ratably over the requisite service period of the award. Determining the appropriate fair-value model and calculating the fair value of stock-based awards at the grant date requires considerable judgment, including estimating stock price volatility, expected option life and forfeiture rates. We develop our estimates based on historical data and market information which can change significantly over time. A small change in the estimates used can have a relatively large change in the estimated valuation.

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

We must assess the likelihood that we will be able to recover our deferred tax assets. We consider historical levels of income, expectations and risks associated with estimates of future taxable income and ongoing prudent and feasible tax planning strategies in assessing the need for the valuation allowance. If recovery is not likely, we must increase our provision for taxes by recording a valuation allowance against the deferred tax assets that we estimate will not ultimately be recoverable. As a result of our analysis of expected future income at March 31, 2005, it was considered more likely than not that a valuation allowance for all U.S. deferred tax assets was required, resulting in a $67.9 million charge included in our tax provision. At March 31, 2007, the valuation allowance against our deferred tax assets totaled $124.1 million.

In addition, the calculation of our tax liabilities involves dealing with uncertainties in the application of complex global tax regulations. We recognize liabilities for anticipated tax audit issues in the United States and other tax jurisdictions based on our estimate of whether, and the extent to which, additional taxes and related interest will be due. If we ultimately determine that payment of these amounts is unnecessary, we reverse the liability and recognize a tax benefit during the period in which we determine that the liability is no longer necessary. We record an additional charge in our provision for taxes in the period in which we determine that the recorded tax liability is less than we expect the ultimate assessment to be. Tax related assets and liabilities as of March 31, 2007 reflect settlements reached during the fiscal year, which generated a net tax benefit of $60.2 million in fiscal 2007 and $26.4 million in fiscal 2005. For a discussion of current tax matters, see Note 14 in the Notes to Consolidated Financial Statements.

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

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

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

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

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

During the first quarter of fiscal 2005, we purchased the IBM i/p Series RAID Business. During the second quarter of fiscal 2005, we purchased Snap Appliance. Accordingly, the estimated fair value of assets acquired and liabilities assumed in the acquisitions and the results of operations of the acquired entities were included in our consolidated financial statements as of the respective effective dates of the acquisitions. There were no significant differences between our accounting policies and those of the IBM i/p Series RAID Business and Snap Appliance. However, as a result of the sale of the IBM i/p Series RAID Business, the related operations have been reclassified to "Income (loss) from discontinued operations, net of taxes" on the Consolidated Statements of Operations, as discussed in Note 2.

The final purchase price totaled $49.3 million, which consisted of a cash payment to IBM of $47.5 million, warrants valued at $1.1 million, net of registration costs, and transaction costs of $0.7 million. This purchase price included a final adjustment of $0.2 million in the first quarter of fiscal 2006 to both goodwill and acquisition costs. In connection with the acquisition, we issued to IBM a warrant to purchase 250,000 shares of our common stock at an exercise price of $8.13 per share. The warrant had a term of five years from the date of issuance and is immediately exercisable. The warrant was valued using the Black-Scholes valuation model using a volatility rate of 62%, a risk-free interest rate of 3.9% and an estimated life of five years. The transaction costs consisted primarily of legal, valuation and other fees.

Of the total assumed stock options, stock options to purchase approximately 0.7 million shares of our common stock, with exercise prices ranging between $1.42 and $5.66 per share, were unvested, which we refer to as the Snap Unvested Options. The Snap Unvested Options have a ten-year term and vest primarily over four years from the date of grant. The intrinsic value of the Snap Unvested Options of $3.6 million was accounted for as deferred stock-based compensation and was recognized as compensation expense over the related vesting periods. In fiscal 2007, with the adoption of SFAS No. 123(R), we reduced the deferred stock-based compensation balance of $0.3 million against "Additional paid-in capital," which is a separate component of stockholders' equity in the Consolidated Balance Sheets.

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

A portion of the Snap Appliance acquisition price totaling $5.4 million was held back, and in connection with the management incentive program, $1.3 million was held back for a total of $6.7 million, also referred to as the Snap Appliance Holdback, for unknown liabilities that may have existed as of the acquisition date. The Snap Appliance Holdback was paid in the second quarter of fiscal 2006, except for funds necessary to provide for any pending claims, which totaled approximately $3.0 million. In fiscal 2007, we resolved all outstanding claims against the Snap Appliance Holdback.

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

In December 2004, we entered into a distribution agreement with IBM for our RAID controllers and connectivity products sold for IBM's iSeries and pSeries servers. The agreement was made through an amendment to our existing i/p Series RAID supply and intellectual property agreement entered into in June 2004 (See Note 16). The distribution agreement was accounted for as a standalone transaction as it was not contemplated at the time we entered into the original IBM i/p Series RAID transaction.  On September 30, 2005, we sold the IBM i/p Series RAID business to IBM. As a result, the distribution agreement was cancelled as part of the sale.

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

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

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

Our exposure to market risk for a change in interest rates relates primarily to our investment portfolio. As of March 31, 2007, our available-for-sale debt investments, excluding those classified as cash equivalents, totaled $479.7 million (see Note 3 of the Notes to Consolidated Financial Statements) and included corporate obligations, commercial paper, other debt securities, municipal bonds and United States government securities, all of which are of high investment grade. They are subject to interest rate risk and will decline in value if market interest rates increase. If market interest rates were to increase immediately and uniformly by 10% from levels as of March 31, 2007, the decline in the fair value of the portfolio would not be material to our financial position. Declines in interest rates will, over time, reduce our interest income.

We consider our direct exposure to equity price risk to be minimal. We invest in technology companies through two venture capital funds. As of March 31, 2007, the carrying value of such investments aggregated $2.0 million. We monitor our equity investments on a periodic basis. In the event that the carrying value of our equity investments exceeds their fair value, and the decline in value is determined to be other-than-temporary, the carrying value is reduced to its current fair value.

We translate foreign currencies into U.S dollars for reporting purposes; currency fluctuations can have an impact on our results. For all three fiscal years presented there was an immaterial currency exchange impact from our intercompany transactions. The amount of local currency obligations settled in any period is not significant to our cash flows or results of operations, although we continuously monitor the amount and timing of those obligations. The effect of an immediate 10% change in exchange rates on forward exchange contracts would not have affected our financial position or results of operations.

See the index appearing under Item 15(a)(1) on page 49 of this Annual Report on Form 10-K for the Consolidated Financial Statements at March 31, 2007 and 2006 and for each of the three years in the period ended March 31, 2007 and the Report of Independent Registered Public Accounting Firm.

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

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

Management assessed the effectiveness of our internal control over financial reporting as of March 31, 2007, the end of our fiscal year. Management based its assessment on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission. Management's assessment included evaluation of such elements as the design and operating effectiveness of financial reporting controls, process documentation, accounting policies, and our overall control environment. We reviewed the results of management's assessment with the Audit Committee of our Board of Directors.

Based on our assessment, management has concluded that our internal control over financial reporting was effective as of March 31, 2007.

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

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

Information with respect to our directors is incorporated by reference from the information under the caption: "Proposal No. 1-Election of Directors" in our definitive Proxy Statement for our 2007 Annual Meeting of Stockholders or the Proxy Statement. Information regarding the compliance by our directors, executive officers and 10% or greater stockholders with Section 16(a) of the Exchange Act is incorporated by reference from the information under the caption: "Section 16(a) Beneficial Ownership Reporting Compliance" from our Proxy Statement. Information with respect to our executive officers is included in Item 4A of Part I of this Annual Report on Form 10-K under the heading "Executive Officers." Information regarding the Audit Committee of our Board of Directors and our Audit Committee financial expert is incorporated by reference from the information under the caption: "Proposal No. 1 - Election of Directors" from the Proxy Statement.

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

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

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

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

Information with respect to the securities authorized for issuance under our equity compensation plans and the security ownership of our common stock by our directors, executive officers and 5% stockholders is incorporated by reference from the information under the captions: "Executive Compensation-Equity Compensation Plan Information" and "Stock Ownership of Principal Stockholders and Management" in our Proxy Statement. Information with respect to the Compensation Committee of our Board of Directors is incorporated by reference from the information under the caption: "Proposal No. 1 - Election of Directors" and "Compensation Committee Interlocks and Insider Participation" from the Proxy Statement.

Information with respect to certain relationships of our directors, executive officers and 5% stockholders and related transactions is incorporated by reference from the information under the caption: "Transactions with Related Persons" in our Proxy Statement. Information regarding director independence is incorporated by reference from the information under the caption: "Proposal No. 1 - Election of Directors" from the Proxy Statement.

Information with respect to principal independent registered public accounting firm fees and services is incorporated by reference from the information under the caption "Proposal No. 2 - Ratification of Appointment of Independent Registered Public Accounting Firm" and "Fees Paid to PricewaterhouseCoopers" in the Proxy Statement.

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

We have completed integrated audits of Adaptec, Inc.'s consolidated financial statements and of its internal control over financial reporting as of March 31, 2007, in accordance with the standards of the Public Company Accounting Oversight Board (United States). Our opinions, based on our audits, are presented below.

In our opinion, the consolidated financial statements listed in the index appearing under Item 15(a)(1) present fairly, in all material respects, the financial position of Adaptec, Inc. and its subsidiaries at March 31, 2007 and 2006, and the results of their operations and their cash flows for each of the three years in the period ended March 31, 2007 in conformity with accounting principles generally accepted in the United States of America. In addition, in our opinion, the financial statement schedule appearing under Item 15(a)(2) presents fairly, in all material respects, the information set forth therein when read in conjunction with the related consolidated financial statements. These financial statements and financial statement schedule are the responsibility of the Company's management. Our responsibility is to express an opinion on these financial statements and financial statement schedule based on our audits. We conducted our audits of these statements in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether the financial statements are free of material misstatement. An audit of financial statements includes examining, on a test basis, evidence supporting the amounts and disclosures in the financial statements, assessing the accounting principles used and significant estimates made by management, and evaluating the overall financial statement presentation. We believe that our audits provide a reasonable basis for our opinion.

Also, in our opinion, management's assessment, included in management's Report on Internal Control Over Financial Reporting appearing under Item 9A, that the Company maintained effective internal control over financial reporting as of March 31, 2007 based on criteria established in Internal Control-Integrated Framework issued by the Committee of Sponsoring Organizations of the Treadway Commission (COSO), is fairly stated, in all material respects, based on those criteria. Furthermore, in our opinion, the Company maintained, in all material respects, effective internal control over financial reporting as of March 31, 2007, based on criteria established in Internal Control-Integrated Framework issued by the COSO. The Company's management is responsible for maintaining effective internal control over financial reporting and for its assessment of the effectiveness of internal control over financial reporting. Our responsibility is to express opinions on management's assessment and on the effectiveness of the Company's internal control over financial reporting based on our audit. We conducted our audit of internal control over financial reporting in accordance with the standards of the Public Company Accounting Oversight Board (United States). Those standards require that we plan and perform the audit to obtain reasonable assurance about whether effective internal control over financial reporting was maintained in all material respects. An audit of internal control over financial reporting includes obtaining an understanding of internal control over financial reporting, evaluating management's assessment, testing and evaluating the design and operating effectiveness of internal control, and performing such other procedures as we consider necessary in the circumstances. We believe that our audit provides a reasonable basis for our opinions.

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

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

/s/ PricewaterhouseCoopers LLP

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

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

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

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

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

Stockholders' equity:
Preferred stock; $0.001 par value
Authorized shares, 1,000; Series A shares, 250 designated;
    outstanding shares, none                                               --           --
Common stock; $0.001 par value
Authorized shares, 400,000; outstanding shares, 118,856 as of
    March 31, 2007 and 115,467 as of March 31, 2006                       119          115
Additional paid-in capital                                            190,236      174,648
Deferred stock-based compensation                                          --         (319)
Accumulated other comprehensive income (loss), net of taxes             3,178       (2,781)
Retained earnings                                                     228,625      197,782
                                                                   -----------  -----------
Total stockholders' equity                                            422,158      369,445
                                                                   -----------  -----------
Total liabilities and stockholders' equity                        $   715,402  $   737,399
                                                                   ===========  ===========

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

See accompanying Notes to Consolidated Financial Statements.

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

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

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

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

The preparation of financial statements in conformity with accounting principles generally accepted in the United States of America requires management to make estimates and assumptions that affect the amounts reported in the consolidated financial statements and accompanying notes. The Company relies on forward looking projections to determine whether a valuation allowance is required related to net deferred tax assets, inventory reserves, impairments of long-lived assets, and the valuation and recognition of stock-based awards. These estimates include, among other things, the amount and timing of future revenues that are expected to come from products and services that have either recently been introduced or that are to be introduced in the future. It is reasonably possible that actual results could differ from such estimates resulting in the need for a valuation allowance for net deferred tax assets, inventory reserve charges, the valuation and recognition of stock-based awards or other charges.

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

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

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

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

The Company did not enter into forward exchange or other derivative foreign currency contracts during the fiscal years ended March 31, 2007, 2006 and 2005. The Company does not hold or issue foreign exchange contracts for trading or speculative purposes. In connection with the issuance of its 3/4% Notes due 2023, the Company entered into a derivative financial instrument to repurchase its common stock, at the Company's option, at specified prices in the future to mitigate potential dilution as a result of the conversion of the 3/4% Notes. See Note 7 for further details.

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

                                                       March 31, 2007           March 31, 2006
                                                    -----------------------  -----------------------
                                                                 Estimated                Estimated
                                                       Cost         Fair        Cost        Fair
                                                       Basis       Value       Basis        Value
                                                    -----------  ----------  ----------  -----------
                                                                     (in thousands)                 
3/4% Notes                                         $   225,000  $  204,750  $  225,000  $   195,188
3% Notes                                                    --          --      10,637       10,527
                                                    -----------  ----------  ----------  -----------
Total                                              $   225,000  $  204,750  $  235,637  $   205,715
                                                    ===========  ==========  ==========  ===========

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

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

Restricted marketable securities consist of United States government securities that are required as security under the indenture related to the 3/4% Notes (Note 7).

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

The Company sells its products to OEMs, distributors and retailers throughout the world. Sales to customers are predominantly denominated in United States dollars and, as a result, the Company believes its foreign currency risk is minimal. The Company performs ongoing credit evaluations of its customers' financial condition and generally does not require collateral from its customers. The Company maintains an allowance for doubtful accounts based upon the expected collectibility of all accounts receivable.

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

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

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

Inventories are stated at the lower of cost or market, with cost determined on a first-in, first-out basis. The Company writes down inventories based on estimated excess and obsolete inventories determined primarily by future demand forecasts. At the point of loss recognition, a new, lower cost basis for that inventory is established, and subsequent changes in facts and circumstances do not result in the restoration or increase in that newly established cost basis.

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

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

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

The Company recognizes revenue from the majority of its product sales, including sales to OEMs, distributors and retailers, upon shipment from the Company, provided that persuasive evidence of an arrangement exists, the price is fixed or determinable and collectibility is reasonably assured.

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

For products which contain software, where software is essential to the functionality of the product, or software product sales, the Company recognizes revenue when passage of title and risk of ownership is transferred to customers, persuasive evidence of an arrangement exists, which is typically upon sale of product by the customer, the price is fixed or determinable and collectibility is reasonably assured, in accordance with SOP No. 97-2, as amended and modified by SOP 98-9. For software sales that are considered multiple element transactions, the entire fee from the arrangement is allocated to each respective element based on its vendor specific fair value or upon the residual method and recognized when revenue recognition criteria for each element are met. Vendor specific fair value for each element is established based on the sales price charged when the same element is sold separately or based upon a renewal rate.

The Company's policy is to capitalize software development costs incurred after technological feasibility has been demonstrated, which is determined to be the time a working model has been completed. Through March 31, 2007, costs incurred subsequent to the establishment of technological feasibility have not been significant and all software development costs have been charged to "Research and development" in the Consolidated Statements of Operations.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

________________________

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

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

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

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

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

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

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

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

Goodwill is not amortized, but instead is reviewed annually and whenever events or circumstances occur which indicate that goodwill might be impaired. Impairment of goodwill is tested at the Company's reporting unit level which is at the Company's operating segment level, by comparing each segment's carrying amount, including goodwill, to the fair value of that segment. To determine fair value, the Company's review process uses the income, or discounted cash flows approach and the market approach. In performing its analysis, the Company uses the best information available under the circumstances, including reasonable and supportable assumptions and projections. If the carrying amount of the segment exceeds its implied fair value, goodwill is considered impaired and a second step is performed to measure the amount of impairment loss, if any.

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

Based on its annual review of goodwill in the fourth quarter of fiscal 2005, the Company recorded an impairment charge of $52.3 million related to its former Channel segment. Factors that led to this conclusion included, but were not limited to, the negative impact of estimates of expected future income associated with increased costs related to acquisitions and business alliances that occurred in fiscal 2005. These additional costs, along with industry technology transitions, placed significant risk on the Company's ability to achieve and maintain profitability, and, therefore adversely impacted its profitability forecasts.

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

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

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

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

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

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

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

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

Note 7. Convertible Notes

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

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

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

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

The Company pays cash interest at an annual rate of 3/4% of the principal amount at issuance, payable semi-annually on June 22 and December 22 of each year, which interest payments commenced on June 22, 2004. Debt issuance costs of $6.8 million are being amortized to interest expense over 5 years. The 3/4% Notes are subordinated to all existing and future senior indebtedness of the Company.

In connection with the issuance of the 3/4% Notes, the Company purchased marketable securities totaling $7.9 million as security for the first ten scheduled interest payments due on the 3/4% Notes. The marketable securities, which consist of United States government securities, are reported at fair market value with unrealized gains and losses, net of income taxes, recorded in "Accumulated other comprehensive income, net of taxes" as a separate component of the stockholders' equity on the Consolidated Balance Sheets. At March 31, 2007, $1.7 million was classified as short-term marketable securities due within one year and $1.6 million was classified as long-term due within three years.

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

During the fourth quarter of fiscal 2004, in conjunction with the issuance of the 3/4% Notes, the Company received $30.4 million from the issuance to an affiliate of one of the initial purchasers of the 3/4% Notes of a warrant to purchase up to 19.2 million shares of the Company's common stock at an exercise price of $18.56 per share. The warrant expires in December 2008. At expiration, the Company may, at its option, elect to settle the warrants on a net share basis or for cash. As of March 31, 2007, the warrant had not been exercised and remained outstanding. The warrant was valued using the Black-Scholes valuation model using a volatility rate of 42%, risk-free interest rate of 3.6% and an expected life of 5 years. The value of the warrant of $30.4 million has been classified as equity because it meets all the equity classification criteria of EITF No. 00-19. The separate warrant and convertible bond hedge transactions have the potential of limiting the dilution associated with the conversion of the 3/4% Notes from approximately 19.2 million to as few as 12.1 million shares.

In fiscal 2007, the Company redeemed the outstanding $10.6 million balance of its 3% Notes at par value. In fiscal 2006, the Company repurchased $24.6 million in aggregate principal amount of its 3% Notes on the open market for an aggregate price of $24.3 million, resulting in a loss on extinguishment of debt of $0.1 million (including unamortized debt issuance costs of $0.3 million). The loss on extinguishment of debt has been included in "Interest and other income" in the Consolidated Statements of Operations.

Assumed Stock Option Plans: The Company has assumed the stock option plans and the outstanding stock options of certain acquired companies, which include Snap Appliance, Inc. in fiscal 2005, Eurologic Systems Group Limited in fiscal 2004, Platys Communications, Inc. in fiscal 2002 and Distributed Processing Technology Corporation in fiscal 1999. No further options may be granted under these assumed plans. However, options that were outstanding under these plans will continue to be governed by their existing terms and may be exercised for shares of the Company's common stock at any time prior to the expiration of the option term. As of March 31, 2007, the Company had 0.2 million shares of common stock reserved that are subject to outstanding options under these assumed plans.

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

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

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

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

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

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

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

Valuation Assumptions

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

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

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

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

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

Equity Incentive Plans: A summary of option activity under all of the Company's equity incentive plans as of March 31, 2007 and changes during fiscal years 2005, 2006 and 2007 is presented below:

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


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

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

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

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

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

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

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

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

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

Net rent expense was approximately $2.5 million, $3.5 million and $2.9 million during fiscal years 2007, 2006 and 2005, respectively.

The Company invests in technology companies through two venture capital funds, Pacven Walden Ventures V Funds and APV Technology Partners II, L.P. At March 31, 2007, the carrying value of such investments aggregated $2.0 million. The Company has also committed to provide additional funding of up to $0.1 million.

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

The Company is a party to litigation matters and claims, including those related to intellectual property, which are normal in the course of its operations, and while the results of such litigation matters and claims cannot be predicted with certainty, the Company believes that the final outcome of such matters will not have a material adverse impact on its financial position or results of operations. However, because of the nature and inherent uncertainties of litigation, should the outcome of these actions be unfavorable, the Company's business, financial condition, results of operations and cash flows could be materially and adversely affected.

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

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

During fiscal years 2007, 2006 and 2005, the Company recorded restructuring charges of $3.7 million, $10.4 million and $5.9 million, respectively. All expenses, including adjustments, associated with the Company's restructuring plans are included in "Restructuring charges" in the Consolidated Statements of Operations and are not allocated to segments, but rather managed at the corporate level. The restructuring plans are discussed in detail below.

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

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

                                                                              Years Ended March 31,
                                                                  ----------------------------------------
                                                                      2007          2006          2005
                                                                  ------------  ------------  ------------
                                                                                (in thousands)            
Interest income                                                  $     24,362  $     16,861  $     11,799
Payment of license fee with NSE                                            --            --        (1,692)
Realized loss on repatriation (Note 3)                                     --            --        (4,466)
Gain (loss) on extinguishment of debt, net (Note 7)                        --           (79)           --
Foreign currency transaction gains (losses)                               963          (301)          692
Interest on tax refunds                                                    --            --           691
Other                                                                     293         1,140         1,345
                                                                  ------------  ------------  ------------
Total                                                            $     25,618  $     17,621  $      8,369
                                                                  ============  ============  ============

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

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

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

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

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

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

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

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

On October 22, 2004, the American Jobs Creation Act of 2004 (the "Act") was signed into law. The Act created a temporary incentive for U.S. companies to repatriate accumulated foreign earnings subject to certain limitations by providing a one-time deduction of 85% for certain dividends from controlled foreign corporations. In the fourth quarter of fiscal 2005, the Company repatriated $360.6 million of undistributed earnings from Singapore to the United States and incurred a tax liability of $17.6 million. The one-time deduction was allowed to the extent that the repatriated amounts were used to fund a qualified Domestic Reinvestment Plan, as required by the Act. If the Company does not spend the repatriated funds in accordance with its reinvestment plan, the Company may incur additional tax liabilities. The Company has not provided for U.S. deferred income taxes or foreign withholding taxes on the remaining undistributed earnings of $255.1 million since these earnings are intended to be reinvested indefinitely. Although the Company does not have any current plans to repatriate the remaining undistributed earnings from its foreign subsidiaries to its United States parent company, if the Company were to do so, additional income taxes at the combined United States Federal and state statutory rate of approximately 40% could be incurred upon such repatriation.

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

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

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

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

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

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

A reconciliation of the numerator and denominator of the basic and diluted income (loss) per share computations for continuing operations, discontinued operations and net income (loss) were as follows:

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

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

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

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

Diluted loss per share from continuing operations, discontinued operations and net loss for fiscal years 2006 and 2005 was based only on the weighted-average number of shares outstanding during each of the periods, as the inclusion of any common stock equivalents would have been anti-dilutive. In addition, certain potential common shares were excluded from the diluted computation from continuing operations, discontinued operations and net income for fiscal 2007 because their inclusion would have been anti-dilutive. The items excluded for fiscal years 2007, 2006 and 2005 were as follows:

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

________________________

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

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

Under an amended intellectual property agreement with IBM, the Company was required to make fixed and variable royalty-based payments to IBM. The fixed payments potentially due under the arrangement total $52.1 million, of which $25.0 million was paid in December 2004, the date the Company entered into the agreement, and the remainder was due quarterly, in varied installments, through December 2008. A portion of the $52.1 million in total payments was contingent upon IBM purchasing certain levels of the Company's products. Upon entering into the agreement, the Company recorded the full remaining amount payable to IBM as a liability in the Consolidated Balance Sheets as the Company considered payment of the full amount to be probable.

The fixed consideration for the distribution agreement of $52.1 million was recorded as an asset to "Prepaid expenses" and "Other long-term assets" in the Consolidated Balance Sheets at March 31, 2005 and the amortization was being included in "Net revenues" in the Consolidated Statements of Operations over a four-year period, reflecting the pattern in which the economic benefits of the assets expected to be realized. The royalty-based fee per unit was calculated using the average net sales price for units sold within the quarter and baseline royalty rates subject to certain adjustment factors. The amortization of the fixed consideration and the royalty-based payments were being recorded as a reduction to revenue in the period the units were sold. On September 30, 2005, the Company sold the IBM i/p Series RAID Business to IBM. As a result, the distribution agreement was cancelled as part of the sale.

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

In connection with the IBM i/p Series RAID acquisition in June 2004, the Company issued a warrant to IBM to purchase 250,000 shares of the Company's common stock at an exercise price of $8.13 per share. The warrant had a term of 5 years from the date of issuance and is immediately exercisable. The warrant was valued at $1.1 million, net of registration costs, using the Black-Scholes valuation model using a volatility rate of 62%, a risk-free interest rate of 3.9% and an estimated life of 5 years.

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

In consideration, the Company paid IBM a non- refundable fee of $26.0 million and issued IBM a warrant to purchase 150,000 shares of the Company's common stock at an exercise price $15.31 per share. The warrant had a term of five years from the date of issuance and was immediately exercisable; however, the warrant expired unexercised in March 2007. The warrant was valued at approximately $1.0 million using the Black-Scholes valuation model using a volatility rate of 71.6%, a risk-free interest rate of 4.7% and an estimated life of five years. The Company allocated $12.0 million of the consideration paid to IBM to the supply agreement and allocated the remainder to the technology license fee. Fair values were determined based on discounted estimated future cash flows related to the Company's OEM ServeRAID business. The cash flow periods used were five years and the discount rates used were 15% for the supply agreement asset and 20% for the technology license fee based upon the Company's estimate of their respective levels of risk. Amortization of the supply agreement and the technology license fee shall be included in "Net revenues" and "Costs of revenues," respectively, over a five-year period reflecting the pattern in which economic benefits of the assets are realized.

In May 2000, the Company entered into a patent cross-license agreement with IBM, which was subsequently amended in March 2002. Under the agreement, the Company obtained a release of past infringement claims made prior to January 1, 2000 and received the right to use certain IBM patents from January 1, 2000 through June 30, 2007. Additionally, the Company granted IBM a license to use all of the Company's patents for the same period. In consideration, the Company paid an aggregate patent fee of $13.3 million. The patent license fee is being amortized over the period from January 1, 2000 through June 30, 2007. A number of the licensed patents have either expired or are no longer significant to the Company's product portfolio. If the Company should determine that it is necessary to extend the term of the patent license beyond June 30, 2007, the Company believes that it will be able to reach agreement with IBM for such an extension, without interruption to its business operations.

The Company has entered into agreements with customers and suppliers that include intellectual property indemnification obligations. These indemnification obligations generally require the Company to compensate the other party for certain damages and costs incurred as a result of third party intellectual property claims arising from these transactions. In each of these circumstances, payment by the Company is conditional on the other party making a claim pursuant to the procedures specified in the particular contract, which procedures typically allow the Company to challenge the other party's claims. Further, the Company's obligations under these agreements may be limited in terms of time and/or amount, and in some instances, the Company may have recourse against third parties for certain payments made by it under these agreements. In addition, the Company has agreements whereby it indemnifies its directors and certain of its officers for certain events or occurrences while the officer or director is, or was, serving at the Company's request in such capacity. These indemnification agreements are not subject to a maximum loss clause; however, the Company maintains a Director and Officer insurance policy which may cover all or a portion of the liabilities arising from its obligation to indemnify its directors and officers. It is not possible to make a reasonable estimate of the maximum potential amount of future payments under these or similar agreements due to the conditional nature of the Company's obligations and the unique facts and circumstances involved in each particular agreement. Historically, the Company has not incurred significant costs to defend lawsuits or settle claims related to such agreements. Therefore, no amount has been accrued in the accompanying consolidated financial statements with respect to these indemnification guarantees.

The Company provides an accrual for estimated future warranty costs based upon the historical relationship of warranty costs to sales. The estimated future warranty obligations related to product sales are recorded in the period in which the related revenue is recognized. The estimated future warranty obligations are affected by product failure rates, material usage and replacement costs incurred in correcting a product failure. If actual product failure rates, material usage or replacement costs differ from the Company's estimates, revisions to the estimated warranty obligations would be required; however, the Company made no adjustments to pre-existing warranty accruals in fiscal years 2007 and 2006.

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

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

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

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

Summarized financial information on the Company's segments, under the new organizational structure, is shown in the following table. The segment financial data for fiscal years 2007, 2006 and 2005 has been restated to reflect this change. There were no inter-segment revenues for the periods shown below. The Company does not separately track all tangible assets or depreciation by segments nor are the segments evaluated under these criteria. Segment financial information is summarized as follows for fiscal years 2007, 2006 and 2005:

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

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

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

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

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

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

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

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

Note 19. Supplemental Disclosure of Cash Flows

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

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

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

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

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

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

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

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

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

________________________

Notes:

(1) Amounts are included in "Accounts receivable" in the Consolidated Balance Sheets.

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

Pursuant to the requirements of Section 13 or 15(d) of the Securities Exchange Act of 1934, the Registrant has duly caused this Report to be signed on its behalf by the undersigned, thereunto duly authorized.