This Quarterly Report on Form 10-Q contains forward-looking statements that involve risks and uncertainties. The statements contained in this document that are not purely historical are forward-looking statements within the meaning of
Section 27A of the Securities Act of 1933 and Section 21E of the Securities Exchange Act of 1934, including, without limitation, statements regarding our expectations, beliefs, intentions or strategies regarding our business, including, but not limited to, our anticipated declines in revenues from our parallel SCSI products and our serial legacy products sold to our OEM customers, the expected benefits of our acquisition of Aristos Logic Corporation, or Aristos, the possibility that we might enter into strategic alliances, partnerships or additional acquisitions to scale our business, the expected impact on our future revenues due to our failure to receive design wins for the next generation serial products from IBM, the possibility that additional significant charges may be recorded by us in the future in light of an ongoing strategic review of our business by management, the potential need to record impairment charges for other intangible assets or marketable securities based on current market conditions, the amount by which we expect to reduce our annual operating expenses due to our fiscal 2009 restructuring plans and our expected liquidity in future periods. We may identify these statements by the use of words such as "anticipate," "believe," "continue," "could," "estimate," "expect," "intend," "may," "might," "plan," "potential," "predict," "project," "should," "will," "would" and other similar expressions. All forward-looking statements included in this document are based on information available to us on the date hereof, and we assume no obligation to update any such forward-looking statements, except as may otherwise be required by law.

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

While management believes that the discussion and analysis in this report is adequate for a fair presentation of the information presented, we recommend that you read this discussion and analysis in conjunction with our Annual Report on Form 10-K for the fiscal year ended March 31, 2009.

Basis of Presentation

In June 2008, we sold the Snap Server NAS portion of our former SSG segment, or Snap Server NAS business, to Overland Storage, Inc., or Overland. Unless otherwise indicated, the following discussion pertains only to our continuing operations.

For your convenience, we have included, in Note 21 to the Notes to the Unaudited Condensed Consolidated Financial Statements, a Glossary that contains a brief description of a few key acronyms commonly used in our industry and a few accounting acronyms, including accounting regulatory bodies, that are used in this Quarterly Report. These acronyms are listed in alphabetical order.

Overview

We provide innovative data center I/O solutions that protect, accelerate, optimize, and condition data in today's most demanding data center environments. Our products are used in IT environments ranging from traditional enterprise environments to fast growing, on-demand cloud computing data centers. Our products enable data center managers, channel partners and OEMs to deploy best-in-class storage solutions to meet their customers' evolving IT and business requirements. Around the world, leading corporations, government organizations, and medium and small businesses trust Adaptec technology. Our software and hardware products include ASICs, HBAs, RAID controllers, Adaptec RAID software, storage management software, storage virtualization software and other solutions that span SCSI, SAS, SATA and iSCSI interface technologies, including both hard disk and sold state drives. System integrators and white box suppliers build server and storage solutions based on Adaptec technology to deliver products with superior price and performance, data protection and interoperability to their clients and customers.

We continue to innovate in the storage I/O space through our Data Conditioning Platform, or DCP strategy. The DCP strategy enables us to deliver new intelligent capabilities seamlessly and affordably in the I/O path. We have been developing products and features based on our DCP strategy since early fiscal 2008. For example, in July 2008, we introduced our Intelligent Power Management software, which increases the energy efficiency of attached hard disk drives without impacting performance. In June 2009, we launched a new product in the unified serial RAID controller family, Series 5Z, which reduces the cost of data center maintenance by leveraging solid state technology to eliminate the need to monitor battery charge levels or power down servers for battery replacement. In September 2009, we launched our MaxIQ SSD Cache Performance Solution, which maximizes performance while minimizing capital and operating costs by utilizing both solid state drives and hard disk drives, to create High-Performance Hybrid Arrays which is expected to deliver up to five times the I/O performance and reduce capital expenditures by as much as 50%, all without disrupting existing operations. We strive to continue to offer products with Green IT features, specifically reducing a company's IT energy costs and minimizing its carbon footprint, for the next generation of green data centers.

Our strategic vision is to continue to extend DCP to deliver new and improved methods for intelligently routing, optimizing and protecting data as it moves though the I/O path. DCP will enable next-generation data centers by optimizing and protecting data, and reducing capital and operating costs, through maximizing system utilization and performance, while achieving Green IT objectives. New capabilities delivered via our DCP can be deployed in fast-growing data centers easily and non-disruptively: no changes are required to existing storage architectures, application software or operating systems.

We are in the midst of managing a transition of our product portfolio from our declining legacy products, which included our parallel SCSI products and our serial legacy products sold primarily to OEM customers, to our newer serial products and features for the next-generation enterprise and cloud data centers that were developed under our DCP strategy. Our future revenue growth is largely dependent on the success of our DCP strategy, including our new and future products, obtaining new OEM design wins, fulfilling our obligations on current OEM design wins, and growing our market share in the channel, as the revenues earned from our newer serial products is currently not enough to offset the decline in revenues from our legacy products due to the loss in market share and the adverse impact on our business caused by current economic conditions. Although customer engagements with our new products continue to grow, we must continue to focus on attracting new customers, including retaining our current customer base, and innovating and delivering products in the storage I/O space, to increase our revenue levels for our recent product introductions.

To succeed with our DCP strategy, we must stay ahead of our competitors and continue to invest and advance in our technology, resulting in expected increases to our research and development expenses in future periods. We will seek additional growth opportunities beyond those presented by our existing product lines by entering into strategic alliances, partnerships or acquisitions of technologies or businesses to grow our business, and we will explore structural alternatives that have the potential to achieve additional stockholder return. We will also continue to evaluate the viability of our existing product portfolio, operating structure and markets. Due to the deterioration of macroeconomic conditions, which has impacted, and will likely continue to impact, information technology spending, we could experience reduced sales of our products and services over the next several quarters. If the deterioration of macroeconomic conditions continues to worsen and our business performance declines, we may be required to record impairment charges for other intangible assets or long-lived assets in the future. Our marketable securities may also decline in value and such decline may be deemed to be other-than-temporary, which would require us to record an impairment charge that would adversely impact our financial results. We may also record significant restructuring charges in the future in light of an ongoing strategic review of our business by management.

In the second quarter of fiscal 2010, our net revenues decreased 42% as compared to the second quarter of fiscal 2009 due to the declining revenue base of our legacy products of $13.6 million, which included our parallel SCSI products and our serial legacy products sold primarily to OEM customers, offset by an increase in sales volumes of our newer serial products and features that were developed under our DCP strategy of $0.4 million. We expect revenues from our parallel SCSI products to continue to decline in future quarters and expect revenues from our serial legacy products sold to OEM customers to decline over the next quarter. Our gross margins in the second quarter of fiscal 2010 improved to 44% compared to 42% in the second quarter of fiscal 2009 primarily due to improved standard product contributions due to favorable customer mixes and lower inventory-related charges, offset by the amortization of acquisition-related intangible assets of $0.5 million, and our fixed costs were distributed over a lower sales volume. Operating expenses slightly increased in the second quarter of fiscal 2010 as compared to the second quarter of fiscal 2009 due to expenses incurred with the development of our technology to achieve new OEM design wins and to expand our channel offerings, engineering expenses related to certain chip design projects and increased professional fees of $0.7 million related to our response to the consent solicitation initiated by Steel Partners, Steel Partners Holdings L.P., Steel Partners LLC, Steel Partners II GP LLC, Warren Lichtenstein, Jack L. Howard, and John J. Quicke (collectively, the "Steel Group") on September 4, 2009 seeking stockholder approval on three proposals relating to our bylaws and the composition of our board of directors. This was partially offset by our continued cost reductions, including temporary reductions in employees' compensation and reductions in outside service providers, and restructuring efforts implemented in the prior fiscal year.

Results of Operations

The following table sets forth the items in the Unaudited Condensed Consolidated
Statements of Operations as a percentage of net revenues (references to notes in
the footnotes to this table are to the Notes to Unaudited Condensed Consolidated
Financial Statements appearing in this report):



                                       Three-Month Period Ended                   Six-Month Period Ended
                                   October 2,          September 26,         October 2,          September 26,
                                      2009                 2008                 2009                 2008
Net revenues                              100 %                  100 %              100 %                  100 %
Cost of revenues (inclusive
of amortization of
acquisition-related
intangible assets)                         56                     58                 55                     56

Gross margin                               44                     42                 45                     44


Operating expenses:
Research and development                   39                     15                 37                     17
Selling, marketing and
administrative                             43                     28                 36                     29
Amortization of
acquisition-related
intangible assets                           2                      0                  1                      0
Restructuring charges
(credits) (1)                              (1 )                    5                  0                      5

Total operating expenses                   83                     48                 74                     51

Loss from continuing
operations                                (39 )                   (6 )              (29 )                   (7 )
Interest and other income,
net                                        13                     20                 12                     18
Interest expense                           (0 )                   (2 )               (0 )                   (2 )

Income (loss) from continuing
operations before income
taxes                                     (26 )                   12                (17 )                    9
Benefit from (provision for)
income taxes                                4                     (2 )                7                     (4 )

Income (loss) from continuing
operations, net of taxes                  (22 )                   10                (10 )                    5


Discontinued operations, net
of taxes
Loss from discontinued
operations, net of taxes                   -                      -                  -                      (1 )
Gain on disposal of
discontinued operations, net
of taxes                                    2                     -                   2                      9

Income from discontinued
operations, net of taxes                    2                     -                   2                      8

Net income (loss)                         (20 )%                  10 %               (8 )%                  13 %

The following actions affect the comparability of the data for the periods presented in the above table:

(1) In the first half of fiscal 2009, we implemented a restructuring plan and recorded adjustments to previous restructuring plans, incurring restructuring charges of $1.4 million and $3.2 million in the second quarter and first half of fiscal 2009, respectively.

Net Revenues.



                                         Three-Month Period Ended                              Six-Month Period Ended
                                October 2,      September 26,     Percentage        October 2,      September 26,     Percentage
                                   2009             2008            Change             2009             2008            Change
                                                               (in millions, except percentages)
Net Revenues                   $       18.4    $          31.7           (42 )%     $      40.2    $          63.2           (36 )%

Net revenues decreased by $13.2 million and $23.0 million in the second quarter and first half of fiscal 2010, respectively, compared to the corresponding periods of fiscal 2009, due to a decline in sales volume of our legacy products, which primarily included our parallel SCSI products and our serial products sold to OEM customers, of $13.6 million and $25.5 million, respectively, offset by an increase in sales volumes of our newer serial products and features that were developed under our DCP strategy of $0.4 million and $2.5 million, respectively. The decline in sales volume of our parallel SCSI products was primarily attributable to the industry transition from parallel to serial products, in which we have a lower market share. The decline in sales volume of our serial legacy products sold to OEM customers was primarily attributable to the fact that certain OEM customers have moved to other suppliers to obtain the next generation serial technologies. We expect net revenues for our parallel SCSI products to continue to decline in future quarters, and expect net revenues from our serial legacy products sold to OEM customers to decline over the next quarter. However, we expect to gain future opportunities to sell serial products to OEMs, due in part to the Aristos acquisition, but our ability to capitalize on these opportunities may be adversely impacted by a reduction in IT spending for servers as a result of current economic conditions.

                                        Three-Month Period Ended                  Six-Month Period Ended
                                    October 2,         September 26,         October 2,         September 26,
                                       2009                2008                 2009                2008
Geographical Revenues:
North America                               37 %                  30 %               38 %                  34 %
Europe                                      32 %                  33 %               31 %                  33 %
Pacific Rim                                 31 %                  37 %               31 %                  33 %

Total Geographical Revenues                100 %                 100 %              100 %                 100 %

Our international revenues decreased as a percentage of our total revenues in the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009 primarily due to a decline in revenues from our largest customer, IBM, who predominately purchases products in the Pacific Rim region, as we did not receive design wins for their current generation products. We expect our international revenues to decrease as a percentage of our total revenues in the future as we expect the revenues from IBM to continue to decline.

A small number of our customers account for a substantial portion of our net revenues. In the second quarter of fiscal 2010, IBM, Ingram Micro and Bell Micro accounted for 22%, 13% and 11% of our total net revenues, respectively. In the second quarter of fiscal 2009, IBM, Bell Micro and Ingram Micro accounted for 36%, 13% and 10% of our total net revenues, respectively. In the first half of fiscal 2010, IBM, Ingram Micro and Bell Micro accounted for 26%, 13% and 12% of our total net revenues, respectively. In the first half of fiscal 2009, IBM and Ingram Micro accounted for 35% and 11% of our total net revenues, respectively.

Gross Margin.



                                                Three-Month Period Ended                                    Six-Month Period Ended
                                    October 2,         September 26,        Percentage        October 2,         September 26,        Percentage
                                       2009                2008               Change             2009                2008               Change
                                                                         (in millions, except percentages)
Gross Profit                       $        8.2       $          13.3              (39 )%     $      18.3       $          28.0              (35 )%

The improvement in gross margin in the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009 was primarily due to improved standard product contributions due to a shift in revenue mix from OEM to channel customers, with channel customers having higher average margins and our end-to-end supply chain efficiencies, including a reduction to our inventory-related charges of $0.4 million and $0.7 million, respectively, offset by the amortization of acquisition-related intangible assets of $0.5 million and $1.5 million, respectively, related to the purchased intangible assets for core and existing technologies and backlog from the acquisition of Aristos in September 2008. Although our fixed operating costs declined from the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009, our gross margins were also impacted by these costs as they were distributed over lower sales volumes.

Research and Development Expense.



                                                  Three-Month Period Ended                                Six-Month Period Ended
                                      October 2,         September 26,       Percentage        October 2,      September 26,      Percentage
                                         2009                2008              Change             2009             2008             Change
                                                                        (in millions, except percentages)
Research and Development Expense     $         7.2     $             4.9             48 %            14.7     $          10.8             37 %

The increase in research and development expense in the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009 was primarily due to the acquisition of the Aristos engineering team and the costs associated with the development of our technology to achieve new OEM design wins and to expand our channel offerings as well as engineering expenses related to certain chip design projects. This was partially offset by the temporary reductions in employees' compensation, which began in the first quarter of fiscal 2010. Our research and development expenses are expected to increase in future periods as we invest further in the development of our technology to pursue other opportunities.

Selling, Marketing and Administrative Expense.



                                                 Three-Month Period Ended                                  Six-Month Period Ended
                                     October 2,         September 26,       Percentage         October 2,       September 26,      Percentage
                                        2009                2008              Change              2009              2008             Change
                                                                        (in millions, except percentages)
Selling, Marketing and
Administrative Expense              $         7.9     $             8.8             (9 )%      $      14.6     $          18.3            (20 )%

The decrease in selling, marketing and administrative expense in the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009 was primarily a result of reductions in our workforce and infrastructure spending due to the restructuring plans we implemented in fiscal 2009, which resulted in a 35% decrease in our average headcount for employees engaged in selling, marketing and administrative functions, temporary reductions in employees' compensation , which began in the first quarter of fiscal 2010, and reductions in outside service providers. This was partially offset by increased professional fees of $0.7 million related to our consent solicitation initiated by the Steel Group on September 4, 2009 seeking stockholder approval on three proposals relating to our bylaws and the composition of our board of directors. We expect to incur additional professional fees of $0.5 million in the next quarter in connection with our consent revocation solicitation.

Amortization of Acquisition-Related Intangible Assets.



                                                     Three-Month Period Ended                                  Six-Month Period Ended
                                         October 2,         September 26,       Percentage         October 2,        September 26,      Percentage
                                            2009                2008              Change              2009               2008             Change
                                                                            (in millions, except percentages)
Amortization of Acquisition-Related
Intangible Assets                       $         0.3     $             0.1            201 %      $         0.7     $           0.1            502 %

The increase in amortization of acquisition-related intangible assets in the second quarter and first half of fiscal 2010 compared to the corresponding periods of fiscal 2009 was due to the amortization of purchased intangible assets from the Aristos acquisition in September 2008 for customer relationships of $0.2 million and $0.5 million, respectively. The amortization of purchased intangible assets from the Aristos acquisition for the core and existing technologies and backlog were reflected in cost of revenues.

Restructuring Charges (Credits).



                                                 Three-Month Period Ended                                Six-Month Period Ended
                                     October 2,           September 26,      Percentage      October 2,        September 26,      Percentage
                                        2009                  2008             Change           2009               2008             Change
                                                                       (in millions, except percentages)

We implemented several restructuring plans during fiscal years 2009 and 2008. The goal of these plans was to bring our operational expenses to appropriate levels relative to our net revenues, while simultaneously implementing extensive company-wide expense-control programs. All expenses, including adjustments, associated with our restructuring plans are included in "Restructuring charges (credits)" in the Unaudited Condensed Consolidated Statements of Operations and are managed at the corporate level. For a complete discussion of all restructuring actions that were implemented prior to fiscal 2010, please refer to Note 11 of the Notes to Consolidated Financial Statements included in our Annual Report on Form 10-K for the fiscal year ended March 31, 2009. In the second quarter and first half of fiscal 2010, we recorded minimal adjustments to the restructuring accrual primarily related to the estimated loss on facilities that we subleased related to our previous acquisition-related restructuring plan.

Interest and Other Income, Net.



                                                      Three-Month Period Ended                                   Six-Month Period Ended
                                         October 2,         September 26,        Percentage        October 2,         September 26,        Percentage
                                            2009                2008               Change             2009                2008               Change
                                                                              (in millions, except percentages)
. . .