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Executives

Subramanian Sundaresh – President, Chief Executive Officer & Director

Christopher G. O’Meara – Chief Financial Officer & Vice President

Analysts

Andrew Neff – Bear Stearns

Adaptec, Inc. (OTC:ADPT-OLD) F3Q08 Earnings Call January 30, 2008 4:45 PM ET

Operator

Good morning. Thank you for joining us for today’s Adaptec quarterly earnings release conference call. This call is being recorded. For opening remarks and introductions I would like to turn the conference over to Ms. Nicole [inaudible]. Please go ahead.

Nicole [Inaudible]

Good afternoon ladies and gentlemen. During today’s call you’ll first hear from Sundi Sundaresh, President and CEO followed by Chris O’Meara Adaptec’s Chief Financial Officer. After Chris’ remarks we will host a brief question and answer session. Some of the comments today will include forward-looking statements regarding future events and/or projections of the financial performance of the company based on our current expectations including projections of operating results for the fourth quarter of fiscal 2008. These statements are subject to significant risk and uncertainties that could cause our actual results to differ materially from those expressed in these forward-looking statements. We refer to you the risk factor section of the documents that Adaptec has filed with the SEC specifically in our most recent Form 10K and 10Q which contain important risk factors that could cause actual results to differ materially from expectations. In addition, some of the financial measures that are included in this presentation are non-GAAP. For a reconciliation of GAAP to non-GAAP measures please visit our website at www.Adaptec.com under the investor relations section.

With that I’d like to introduce Adaptec’s president and CEO Sundi.

Subramanian Sundaresh

Good afternoon and thank you everyone for joining us. During this call we’ll be reviewing our latest quarterly results, market developments that impact our business and the progress we’ve made to improve our operating results. Before we conclude we will discuss deal partners and changes in our board composition.

Adaptec revenues for the third fiscal quarter were $41 million within our guidance range of $39 million to $43 million. We recorded non-GAAP income from continuing operations net of taxes of $4.6 million or $0.04 per share which is above our guidance of a $0.03 loss to a $0.01 income. Finally, we are pleased to report that our gross margins have been slowing showing steady improvement in fiscal 2008 from 32% at the end of fiscal 2007 to 39% in the current fiscal quarter an overall seven point improvement in this fiscal year. The improvement in the current fiscal quarter was driven by manufacturing and procurement efficiencies and a more advantageous product mix. Later in our call Chris will provide further details on the company’s financials and outlet.

Over the past year we’ve discussed with you the fundamental dynamics in the rate market and how it will affect Adaptec’s financial performance. In the face of our decreasing OEM revenues and the continued transition of [inaudible] technologies to serial solutions we still expect to see considerable revenue decline over the next three to 12 months. Given this revenue outlook we have continued to make the hard decisions that are best for the long term business. Two quarters ago we reduced headcount and expense levels in the OEM portion of the DPS business. We started to see the benefits of this change in the second fiscal quarter, saw a greater impact on expenses this quarter and will fully realize the benefits of this by the close of the fourth fiscal quarter.

Overall, since I rejoined Adaptec in the first quarter of fiscal 2006 we’ve divested several non strategic businesses, significantly reduced operating expenses and improved gross margins by 10%. Despite these market circumstances the team at Adaptec continues to design and manufacture outstanding products to enable new market penetration and growth. Our unified serial controllers launched last March providing Adaptec quality wins over our competitors. We are seeing sequential growth and gaining traction in the channel with our serial products. During the quarter we acquired many new customers in the US and in high growth areas such as China and Russia. While we are pleased with the flow of new products in our storage solutions group of SSG, we are disappointed with our revenue performance. To fix our execution issues we have realigned ourselves and market efforts to emphasize larger deal sizes on distributive NADs and targeted verticals.

On a separate note Steve Terlizzi who is the general manager of SSG will be leaving the company at the end of this week. I want to thank him for his many contributions to Adaptec during his tenure. To insure continuity I will be assuming direct responsibility for this business unit. Overall, we remain focused on bringing SSG back on track.

Our systems revenue issues notwithstanding, we have a very solid award winning product suite. Last quarter we introduced a new series of [inaudible] storage appliances, leveraging the company’s on target software. These products are designed for medium size businesses that need to cost effectively deploy an IP SAN. They have been received well in the press and we are very pleased with initial market validation and traction. In fact, in January Info World named the Snap Server 720i the best entry level SAN in their 2008 Technology of the Year Awards. Winning this award category confirms the Snap Server 720i as the best overall IP SAN product available for midsized companies. This exceptional independent praise validates the quality of work the team at Adaptec continues to deliver.

Finally, as we spoke of in the last earnings call, Adaptec has reached an agreement with our largest shareholder Steel Partners. Under this agreement we have expanded our board of directors by one member from eight to nine and in doing so added three members nominated by Steel. This decision was ratified at the shareholders’ meeting in December and we subsequently added John Muth, John Quicke and Jack Howard to our board. The board has met since the shareholder meeting and has focused on bringing the new board members up to speed. As we continue to work together we’ll keep you posted on our decisions and Adaptec’s future direction.

In conclusion, I’d like to note that the entire team is very focused at improving our competitive position and performance. I’m pleased by our product execution in the quarter. We also expect to announce several new products to add to our competitive suite. In the meantime, I want to thank our stakeholders, principally employees and shareholders and our customers for their contribution and patience as we work through this difficult time. We’ll keep you apprised of the status of the company’s future strategy. At this time I will now turn the call over to Chris O’Meara, Adaptec’s chief financial officer for a review of our financials.

Christopher G. O’Meara

Welcome everyone. Please note that all the financial numbers I am discussing will be on a non-GAAP basis unless otherwise noted. In summary for the quarter our total net revenues of $41.2 million includes $36.1 million of revenue from our DPS business and $5.1 million from our SSG business. The overall channel mix was approximately 46% of total revenue. Our top customer IBM, represented 38% of revenue while our largest distribution Ingram Micro represented 12% of our net revenue for the third quarter fiscal 08.

Our gross margin in Q3 was 39% compared to 35% in Q2 as we have continued to lower our product component costs and had a favorable product mix. Our total cash and investments remain flat at $598 million. Note that net interest and other income was unusually high, approximately $8 million, due to a $1.6 million onetime recognition on a gain on a bond we held in a subsidiary. Our non-GAAP EPS was a $0.04 income per share compared with a $0.02 loss in Q2.

Now, I would like to provide you with some guidance for the fourth quarter of fiscal 08. We expect to continue to experience decrease in OEM and parallel [inaudible] revenue and we further expect these factors to be partially offset by growth in our serial solutions channel business. As a result, we expect revenue to range from $35 million to $40 million. Non-GAAP EPS is expected to range from a $0.03 loss to a $0.01 gain.

Now, I’ll turn the call back to the operator to being the Q&A portion of our call.

Question-and-Answer Session

Operator

(Operator Instructions) We’ll take our first question from Andrew Neff of Bear Stearns.

Andrew Neff – Bear Stearns

Is there any way you can give us a sense of any of the proposals or actions from the Steel Partners? Anything that they’re proposing that you can talk about?

Subramanian Sundaresh

Nothing at this time Andy. Right now we’re focused on bringing them up to speed on all aspects of the business and reviewing all the various options we’ve considered over the last year. We’ll see more color at the end of this quarter.

Andrew Neff – Bear Stearns

The second thing, just from a balance sheet standpoint, can you talk about any particular cash needs you have over the next year or so? And, what you’re doing to protect the balance sheet?

Christopher G. O’Meara

Well, the balance sheet is very strong. We have invested through outside providers the funds and they’re all in AAA, very secure bonds and treasury. So, in respect we’re clearly very conservative, very short duration as well. The cash needs to run the business, we really have very little capital investment and I think which we’ve talked in the past, our focus has been around using the cash for acquisitions that can really grow the business.

Andrew Neff – Bear Stearns

In terms of the convert, when is that due?

Christopher G. O’Meara

Well, the investors and the convert have a put that they can exercise in December of this year. Otherwise, the convertible expires basically in 2013.

Andrew Neff – Bear Stearns

And how does the put work?

Christopher G. O’Meara

They have a right to basically put the convert back to us and it would be paid off on the bond at par.

Andrew Neff – Bear Stearns

Where are the bonds trading now?

Christopher G. O’Meara

Bonds are trading in the low 90s. Basically, the coupon rate is 0.75% so it’s actually below rates. As of the autumn time frame, winter time frame it was trading pretty much at a 93 kind of rate.

Andrew Neff – Bear Stearns

So, how much would you have to pay back at the end of the year?

Christopher G. O’Meara

Well, we don’t know. Given the coupon while the total bond is $225 million that was issued so it obviously depends upon how many people actually tendered the bond. But, from a planning standpoint we’re assuming that pretty much all of them would be tendered for payments.

Operator

(Operator Instructions) It appears that there are no further questions at this time. I’d like to turn the call back over to Mr. Sundi Sundaresh for any closing remarks.

Subramanian Sundaresh

In summary I just want to say that we remain focused on improving the operating model and maintaining the strength on our balance sheet. Thank you all for listening today.

Operator

Ladies and gentlemen that does conclude today’s conference call. We’d like to thank you all for your participation and have a great day.

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