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we recorded in the year ended November 30, 2005 primarily relates to a reduction in the deferred taxasset arising from the usage of U.K. operating loss carryforwards.In November 2005 we amended our legal structure whereby income earned outside the UnitedKingdom could be distributed to Xyratex Ltd, which is registered in Bermuda, without being subject toU.K. taxation. This substantially removed the risk that our tax rate would increase upon the expiry ofcertain beneficial elements of an international tax treaty between Malaysia and the United Kingdom.This change also resulted in a tax benefit of $0.9 million arising from the release of a provision forU.K. taxation on undistributed income in Malaysia.Equity Compensation ExpenseIn our 2004 fiscal year, as a consequence of our initial public offering, we recorded a non-cashequity compensation expense of $181.1 million, of which $1.0 million related to the vesting of share andoption awards subsequent to the offering. Of this amount $168.1 million was included in continuingoperations and $12.9 million was included in discontinued operations. The equity compensation expenseof $181.1 million is associated with the historical grants of Xyratex Group Limited class A preferredordinary and class C ordinary shares totaling 10.6 million shares, and 3.8 million unexercised shareoptions and other equity incentives awarded to our employees. U.S. GAAP requires that compensationexpense for awards of shares, share options and other equity-based awards be measured on the firstdate that the number of shares that an employee is entitled to receive and the option or purchase priceis known, referred to as the final measurement date. The final measurement date for grants of XyratexGroup Limited’s class A preferred ordinary shares, as well as some of the share options, was thecompletion date of the initial public offering because the transferability restrictions associated with theshares lapsed on that date.Under our existing accounting policy we record equity compensation expense using the intrinsicvalue method prescribed by Accounting Principles Board Opinion (‘‘APB’’) 25—‘‘Accounting for StockIssued to Employees’’. We recorded an expense of $0.8 million in our 2005 fiscal year related to0.3 million share awards based on the prorated vesting of those shares during the year. In our 2006fiscal year we will be required to record equity compensation expense using the fair value methodrequired by Financial Accounting Standard (FAS) 123R—‘‘Share Based Payment’’. Included in Note 2to our consolidated financial statements is a calculation of the expense using a fair-value-based methodrequired by FAS 123. We do not expect the calculation of equity expense under FAS 123R to differmaterially from the pro forma calculations included in Note 2.We were also required to record a non-cash equity compensation expense of $57.3 million fromcontinuing operations and $19.9 million from discontinued operations in our 2003 fiscal year related tothe private equity transaction with HgCapital described above. The compensation expense followed theremoval of transferability restrictions on the shares held by employees which were sold to XyratexGroup Limited and funds managed by HgCapital. The removal of the transferability restrictionstriggered a final measurement date for the share awards under U.S. GAAP as described above. Thecompensation expense is calculated as the difference between the price paid by Xyratex Group Limitedand funds managed by HgCapital for the 11.2 million shares purchased in connection with thetransaction (totaling $80.0 million) and the amount which the employees that sold shares to fundsmanaged by HgCapital originally paid for those shares (totaling $2.8 million).These compensation expense amounts are recorded as cost of revenues, research and developmentexpense or selling, general and administrative expense, in accordance with the function of the relevantemployee, or as discontinued operations for certain ex-employees. We accordingly recorded asubstantial operating and net loss in both our 2004 and 2003 fiscal years.44